Derivatives Clearing Organization General Provisions and Core Principles, 22226-22317 [2019-09025]
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Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
COMMODITY FUTURES TRADING
COMMISSION
17 CFR Parts 1, 39, and 140
RIN 3038–AE66
Derivatives Clearing Organization
General Provisions and Core
Principles
Commodity Futures Trading
Commission.
ACTION: Notice of proposed rulemaking.
AGENCY:
The Commodity Futures
Trading Commission (Commission) is
proposing amendments to certain
regulations applicable to registered
derivatives clearing organizations
(DCOs). These proposed amendments
would, among other things, address
certain risk management and reporting
obligations, clarify the meaning of
certain provisions, simplify processes
for registration and reporting, and
codify existing staff relief and guidance.
In addition, the Commission is
proposing technical amendments to
certain provisions, including certain
delegation provisions, in other parts of
its regulations.
DATES: Comments must be received by
July 15, 2019.
ADDRESSES: You may submit comments,
identified by ‘‘Derivatives Clearing
Organization General Provisions and
Core Principles’’ and RIN 3038–AE66,
by any of the following methods:
• CFTC Comments Portal: https://
comments.cftc.gov. Select the ‘‘Submit
Comments’’ link for this rulemaking and
follow the instructions on the Public
Comment Form.
• Mail: Send to Christopher
Kirkpatrick, Secretary of the
Commission, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
• Hand Delivery/Courier: Follow the
same instructions as for Mail, above.
Please submit your comments using
only one of these methods. To avoid
possible delays with mail or in-person
deliveries, submissions through the
CFTC Comments Portal are encouraged.
All comments must be submitted in
English, or if not, accompanied by an
English translation. Comments will be
posted as received to https://
comments.cftc.gov. You should submit
only information that you wish to make
available publicly. If you wish the
Commission to consider information
that you believe is exempt from
disclosure under the Freedom of
Information Act (FOIA), a petition for
confidential treatment of the exempt
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SUMMARY:
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information may be submitted according
to the procedures established in § 145.9
of the Commission’s regulations.1
The Commission reserves the right,
but shall have no obligation, to review,
pre-screen, filter, redact, refuse or
remove any or all of your submission
from https://comments.cftc.gov that it
may deem to be inappropriate for
publication, such as obscene language.
All submissions that have been redacted
or removed that contain comments on
the merits of the rulemaking will be
retained in the public comment file and
will be considered as required under the
Administrative Procedure Act and other
applicable laws, and may be accessible
under the FOIA.
FOR FURTHER INFORMATION CONTACT:
Eileen A. Donovan, Deputy Director,
202–418–5096, edonovan@cftc.gov;
Parisa Abadi, Associate Director, 202–
418–6620, pabadi@cftc.gov; Eileen R.
Chotiner, Senior Compliance Analyst,
202–418–5467, echotiner@cftc.gov;
Abigail S. Knauff, Special Counsel, 202–
418–5123, aknauff@cftc.gov; Division of
Clearing and Risk, Commodity Futures
Trading Commission, Three Lafayette
Centre, 1155 21st Street NW,
Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Project KISS
B. Regulatory Framework for DCOs
II. Amendments to Part 1—General
Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From
Depositories—§ 1.20
B. Governance and Conflicts of Interest—
§§ 1.59, 1.63, and 1.69
III. Amendments to Part 39—Subpart A—
General Provisions Applicable to DCOs
A. Definitions—§ 39.2
B. Procedures for Registration—§ 39.3
C. Procedures for Implementing DCO Rules
and Clearing New Products
IV. Amendments to Part 39—Subpart B—
Compliance With Core Principles
A. Compliance With Core Principles—
§ 39.10
B. Financial Resources—§ 39.11
C. Participant and Product Eligibility—
§ 39.12
D. Risk Management—§ 39.13
E. Treatment of Funds—§ 39.15
F. Default Rules and Procedures—§ 39.16
G. Rule Enforcement—§ 39.17
H. Reporting—§ 39.19
I. Public Information—§ 39.21
J. Governance Fitness Standards, Conflicts
of Interest, and Composition of
Governing Boards—§§ 39.24, 39.25, and
39.26
1 17 CFR 145.9. Commission regulations referred
to herein are found at 17 CFR chapter I (2018), and
are accessible on the Commission’s website at
https://www.cftc.gov/LawRegulation/Commodity
ExchangeAct/index.htm.
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K. Legal Risk—§ 39.27
L. Fully-Collateralized Positions
V. Amendments to Part 39—Subpart C—
Provisions Applicable to SIDCOs and
DCOs That Elect To Be Subject to the
Provisions
A. Financial Resources for SIDCOs and
Subpart C DCOs—§ 39.33
B. Risk Management for SIDCOs and
Subpart C DCOs—§ 39.36
C. Additional Disclosure for SIDCOs and
Subpart C DCOs—§ 39.37
D. Corrections to Subpart C Regulations
VI. Amendments to Appendix A to Part 39—
Form DCO
VII. Amendments to Appendix B to Part 39—
Subpart C Election Form
VIII. Amendments to Part 140—Organization,
Functions, and Procedures of the
Commission
IX. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Project KISS
The Commission is engaging in an
agency-wide review of its rules,
regulations, and practices to make them
simpler, less burdensome, and less
costly, and to make progress on G–20
regulatory reforms. This initiative is
called Project KISS, which stands for
‘‘Keep It Simple, Stupid.’’ 2 Consistent
with these objectives, the Commission is
proposing amendments to regulations
applicable to DCOs to, among other
things, enhance certain risk
management and reporting obligations,
clarify the meaning of certain
provisions, simplify processes for
registration and reporting, and codify
existing relief and guidance.
B. Regulatory Framework for DCOs
Section 5b(c)(2) of the Commodity
Exchange Act (CEA) sets forth core
principles with which a DCO must
comply in order to be registered and to
maintain registration as a DCO (DCO
Core Principles).3 In 2011, the
Commission adopted regulations in
2 See Remarks of Acting Chairman J. Christopher
Giancarlo before the 42nd Annual International
Futures Industry Conference in Boca Raton, FL,
Mar. 15, 2017, available at https://www.cftc.gov/
PressRoom/SpeechesTestimony/opagiancarlo-20.
On February 24, 2017, President Donald J. Trump
issued Executive Order 13777: Enforcing the
Regulatory Reform Agenda (E.O. 13777). E.O. 13777
directs federal agencies, among other things, to
designate a Regulatory Reform Officer and establish
a Regulatory Reform Task Force. Although the
CFTC, as an independent federal agency, is not
bound by E.O. 13777, the Commission is
nevertheless engaging in an agency-wide review of
its rules, regulations, and practices to make them
simpler, less burdensome, and less costly. See
Request for Information, 82 FR 23756 (May 24,
2017).
3 7 U.S.C. 7a–1.
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subparts A and B of part 39 to
implement the DCO Core Principles.4 In
2013, the Commission adopted
regulations in subpart C of part 39 5 to
establish additional standards for
compliance with the DCO Core
Principles for those DCOs that have
been designated as systemically
important (SIDCOs) by the Financial
Stability Oversight Council in
accordance with Title VIII of the DoddFrank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act).6 The
subpart C regulations are consistent
with the Principles for Financial Market
Infrastructures (PFMIs), published by
the Committee on Payments and Market
Infrastructures (CPMI) and the
Technical Committee of the
International Organization of Securities
Commissions (IOSCO).7 Other DCOs
may elect to opt-in to the subpart C
requirements (subpart C DCOs) in order
to achieve status as a qualifying central
counterparty (QCCP).8
Since the part 39 regulations were
adopted, Commission staff has worked
4 See Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR 69334 (Nov.
8, 2011) (codified at 17 CFR part 39); Customer
Clearing Documentation, Timing of Acceptance for
Clearing, and Clearing Member Risk Management,
77 FR 21278 (Apr. 9, 2012) (further amending
§ 39.12).
5 Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013).
6 See Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010).
7 See CPMI–IOSCO, Principles for Financial
Market Infrastructures (Apr. 2012), available at
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD377.pdf.
8 In July 2012, the Basel Committee on Banking
Supervision, the international body that sets
standards for the regulation of banks, published the
‘‘Capital Requirements for Bank Exposures to
Central Counterparties’’ (Basel CCP Capital
Requirements), which describes standards for
capital charges arising from bank exposures to
central counterparties (CCPs) related to over-thecounter derivatives, exchange-traded derivatives,
and securities financing transactions. The Basel
CCP Capital Requirements create financial
incentives for banks, including their subsidiaries
and affiliates, to clear financial derivatives with
CCPs that are prudentially supervised in a
jurisdiction where the relevant regulator has
adopted rules or regulations that are consistent with
the standards set forth in the PFMIs. Specifically,
the Basel CCP Capital Requirements introduce new
capital charges based on counterparty risk for banks
conducting financial derivatives transactions
through a CCP. These incentives include (1) lower
capital charges for exposures arising from
derivatives cleared through a QCCP, and (2)
significantly higher capital charges for exposures
arising from derivatives cleared through nonqualifying CCPs. A QCCP is defined as an entity
that (i) is licensed to operate as a CCP and is
permitted by the appropriate regulator to operate as
such, and (ii) is prudentially supervised in a
jurisdiction where the relevant regulator has
established and publicly indicated that it applies to
the CCP, on an ongoing basis, domestic rules and
regulations that are consistent with the PFMIs. The
failure of a CCP to achieve QCCP status could result
in significant costs to its bank customers.
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with DCOs to address questions
regarding interpretation and
implementation of the requirements
established in the regulations. In light of
this, the Commission believes it would
be helpful to revise or clarify certain
provisions of part 39 and to codify staff
relief or guidance granted in the interim.
The Commission is also proposing a few
new requirements with respect to
default procedures and event-specific
reporting in response to recent events.
The Commission believes these changes
will provide greater clarity and
transparency for DCOs and DCO
applicants and lead to more effective
DCO compliance and risk management
generally.
The Commission has carefully
considered the costs and benefits
associated with the proposed
amendments, and invites commenters to
provide data and analysis regarding any
aspect of the proposed rulemaking. In
addition to the amendments proposed
herein, the Commission requests
comment for any other aspects of part
39 that commenters believe the
Commission should clarify or otherwise
amend.
II. Amendments to Part 1—General
Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From
Depositories—§ 1.20
Regulation 1.20(d)(1) requires that a
futures commission merchant (FCM)
obtain a written acknowledgment from
each depository with which the FCM
deposits futures customer funds.9 The
written acknowledgment must conform
to a template letter set forth in appendix
A to § 1.20, and the template letter
includes certain requirements set forth
in § 1.20(d)(3) through (6). Regulation
1.20(d)(1) further provides, however,
that an FCM is not required to obtain a
written acknowledgment from a DCO
that has adopted rules that provide for
the segregation of customer funds in
accordance with all relevant provisions
of the CEA and the Commission’s rules
and orders thereunder. The Commission
is proposing to amend § 1.20(d) to
clarify that the requirements listed in
§ 1.20(d)(3) through (6) do not apply to
a DCO, or to an FCM that clears through
that DCO, if the DCO has adopted rules
that provide for the segregation of
customer funds. The proposed changes
are not intended to be substantive, but
rather to reflect the Commission’s intent
when § 1.20 was last amended.
9 Regulation 22.5 applies the written
acknowledgment letter requirements of § 1.20(d) to
FCMs and DCOs in connection with the holding of
cleared swaps customer collateral.
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Nonetheless, the Commission
emphasizes that it has ample means of
obtaining information regarding
accounts held at a DCO under § 1.20 by
virtue of its ongoing oversight and
supervision of DCOs. The Commission
also is proposing to amend § 1.20(d)(7)
and (8) to explicitly account for FCMs
that deposit customer funds with a DCO
and thus are not required to obtain a
written acknowledgment letter.
B. Governance and Conflicts of
Interest—§§ 1.59, 1.63, and 1.69
In the course of adopting the current
part 39 regulations, the Commission
removed and replaced § 39.2,10 which
had exempted DCOs from all
Commission regulations except for those
specified therein (the ‘‘§ 39.2
exemption’’). The Commission noted
that the § 39.2 exemption failed to
account for regulations applicable to
DCOs that were adopted later, such as
§ 1.49.11 The Commission further noted
that removal of the § 39.2 exemption
would subject DCOs only to § 1.49 and
three additional regulations: §§ 1.59
(activities of self-regulatory organization
employees, governing board members,
committee members, and consultants);
1.63 (service on self-regulatory
organization governing boards or
committees by persons with
disciplinary histories); and 1.69 (voting
by interested members of self-regulatory
organization governing boards and
various committees).12 The Commission
explained that these three provisions
would be superseded by regulations the
Commission had proposed to
implement Core Principles O
(Governance Arrangements), P
(Conflicts of Interest), and Q
(Composition of Governing Boards).13
However, the Commission did not
adopt those regulations, and §§ 1.59,
1.63, and 1.69 became applicable to
DCOs. The Commission is now
proposing to adopt implementing
regulations for Core Principles O, P, and
Q by moving certain requirements from
subpart C, which is applicable to only
SIDCOs and subpart C DCOs, to subpart
B, which is applicable to all registered
10 The current § 39.2 sets forth definitions of
terms used in part 39.
11 See Risk Management Requirements for
Derivatives Clearing Organizations, 76 FR 3698,
3714 (Jan. 20, 2011) (proposed rule).
12 Id. at 3714 & n.77.
13 See Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and
Swap Execution Facilities Regarding the Mitigation
of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010)
(proposed rule); Governance Requirements for
Derivatives Clearing Organizations, Designated
Contract Markets, and Swap Execution Facilities;
Additional Requirements Regarding the Mitigation
of Conflicts of Interest, 76 FR 722 (Jan. 6, 2011)
(proposed rule).
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DCOs (discussed further below).
Therefore, the Commission is proposing
to restore DCOs’ exemption from
§§ 1.59, 1.63, and 1.69 by removing
‘‘clearing organization’’ from the
definition of ‘‘self-regulatory
organization’’ in each of those
regulations. The Commission is also
proposing to amend § 1.64 to remove
language that makes clear that the
provision does not apply to DCOs. The
amendments to the other provisions
make that language no longer necessary.
III. Amendments to Part 39—Subpart
A—General Provisions Applicable to
DCOs
A. Definitions—§ 39.2
Regulation 39.2 sets forth definitions
applicable to terms used in part 39 of
the Commission’s regulations. Since
§ 39.2 was adopted, the Commission has
adopted definitions for some of the
same terms that apply in other
Commission regulations. Accordingly,
the Commission is proposing
amendments to § 39.2 in order to
maintain consistency with terms
defined elsewhere in Commission
regulations and to provide clarity with
respect to the use of these terms.
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1. Business Day
Regulation 39.19(b)(3) defines
‘‘business day,’’ but because the
definition is contained within § 39.19, it
is not clear that it is applicable to uses
of the term ‘‘business day’’ elsewhere in
part 39. The Commission is therefore
proposing to remove § 39.19(b)(3) and
include the definition of ‘‘business day’’
in § 39.2. The Commission also is
proposing to clarify that the term
‘‘Federal holidays’’ in the ‘‘business
day’’ definition refers to the schedule of
U.S. federal holidays established under
5 U.S.C. 6103. The Commission is
specifying this because some DCOs
registered with the Commission are
located outside the United States.
Finally, the Commission is defining
‘‘foreign holiday’’ as a day on which a
DCO and its domestic financial markets
are closed for a holiday that is not a
Federal holiday in the United States,
and adding the term to the list of
exceptions to the definition of ‘‘business
day.’’ The Commission believes there is
no reason to require foreign DCOs to
report on a non-trading day.
2. Customer
Regulation 39.2 defines ‘‘customer,’’
for purposes of part 39, as a person
trading in any commodity named in the
definition of ‘‘commodity’’ in section
1a(9) of the CEA or in § 1.3 of the
Commission’s regulations, or in any
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swap as defined in section 1a(47) of the
CEA or in § 1.3. The definition further
distinguishes a customer from the
owner or holder of a house account.
After § 39.2 was adopted, the
Commission amended the definition of
‘‘customer’’ in § 1.3, to mean any person
who uses a futures commission
merchant, introducing broker,
commodity trading advisor, or
commodity pool operator as an agent in
connection with trading in any
commodity interest. The Commission
also amended the definition of
‘‘commodity interest’’ in § 1.3 to include
any swap as defined in the CEA, by the
Commission, or jointly by the
Commission and the Securities and
Exchange Commission.
Because the definition of ‘‘customer’’
in § 1.3 now encompasses the definition
in § 39.2, the Commission believes that
the definition in § 39.2 is unnecessary
and may create uncertainty. Therefore,
the Commission is proposing to remove
the definition of ‘‘customer’’ in § 39.2,
leaving the definition in § 1.3 as the
applicable definition for purposes of
part 39.
3. Customer Account or Customer
Origin
Regulation 39.2 defines ‘‘customer
account or customer origin’’ as a
clearing member account held on behalf
of customers that is subject to section
4d(a) or section 4d(f) of the CEA. After
§ 39.2 was adopted, the Commission
adopted the definition of ‘‘customer
account’’ in § 1.3 to include both a
futures account and a cleared swaps
customer account, which are accounts
subject to sections 4d(a) and 4d(f) of the
CEA, respectively.
The Commission believes that having
a definition of ‘‘customer account or
customer origin’’ in § 39.2 and a
definition of ‘‘customer account’’ in
§ 1.3 may create uncertainty. Because
the part 39 regulations use both
‘‘customer account’’ and ‘‘customer
origin’’ terms, the Commission is
proposing to amend the definition of
‘‘customer account or customer origin’’
in § 39.2 to cross-reference the
definition of ‘‘customer account’’ in
§ 1.3, rather than removing the
definition or the term ‘‘customer
origin.’’
4. Enterprise Risk Management
The Commission is proposing to
define ‘‘enterprise risk management’’
because the term is used in proposed
§ 39.10(d), which is discussed below.
5. Fully-Collateralized Position
The Commission is proposing to
define ‘‘fully-collateralized position’’ in
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conjunction with proposed exceptions
from several part 39 regulations for
DCOs that clear fully-collateralized
positions, as discussed below.
6. Key Personnel
The Commission is proposing to add
‘‘chief information security officer’’ to
the list of positions identified in the
definition of ‘‘key personnel’’ in § 39.2.
In the event of a cybersecurity incident,
it is critical that Commission staff be
able to quickly contact the person at
each DCO responsible for responding to
the incident to assess the DCO’s
response as well as to coordinate efforts
among DCOs as necessary.
B. Procedures for Registration—§ 39.3
1. Application Procedures—§ 39.3(a)
The Commission is proposing to make
several changes to its procedures for
registration as a DCO, set forth in § 39.3.
Regulation 39.3(a)(1) refers to ‘‘[a]n
organization desiring to be registered as
a [DCO],’’ while § 39.3(a)(2) refers to
‘‘[a]ny person seeking to register as a
[DCO].’’ To make the language
consistent, the Commission is proposing
to revise § 39.3(a)(1) and (2) to refer to
an ‘‘entity seeking to register as a
[DCO].’’ The Commission is proposing
additional changes to § 39.3(a)(1) to
improve the clarity of the text.
Regulation 39.3(a)(2) requires an
applicant for DCO registration to submit
to the Commission a completed Form
DCO, which is provided in appendix A
to part 39.14 Since the adoption of Form
DCO, the Commission has identified
several areas in which changes to Form
DCO are needed. Many of the revisions
to the part 39 regulations proposed
herein would require corresponding
changes to Form DCO. Therefore, the
Commission is proposing to revise Form
DCO as discussed in Section VI. below.
Regulation 39.3(a)(3) provides that at
any time during the application review
process, the Commission may request
that the DCO applicant submit
supplemental information in order for
the Commission to process the
application. An applicant is required to
‘‘file electronically’’ such supplemental
information with the Secretary of the
Commission, in the format and manner
specified by the Commission. The
Commission is proposing to amend
§ 39.3(a)(3) to require an applicant to
‘‘provide’’ such supplemental
information and to delete the
14 At the time § 39.3(a)(2) was adopted, Form DCO
was the only appendix to part 39. Since then,
appendices have been added to part 39, and Form
DCO is now set forth in appendix A. Therefore, the
Commission is proposing to revise § 39.3(a)(2) to
reference ‘‘Form DCO . . . as provided in appendix
A to this part.’’
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requirement that it be filed with the
Secretary of the Commission. By making
these changes, yet retaining the
requirement that the information be
provided in the format and manner
specified by the Commission, the
Commission and DCO applicants would
have greater flexibility. For example, the
Commission would be able to permit an
applicant to provide requested
information through a presentation to
Commission staff.
Regulation 39.3(a)(5) provides for
certain sections of a DCO application to
be made public, including the ‘‘first
page of the Form DCO cover sheet.’’ The
regulation refers to Form DCO as it
appears in the print edition of the Code
of Federal Regulations. However, the
Commission is aware that Form DCO
may appear differently in other sources,
so the Commission is proposing to
amend § 39.3(a)(5) to specify that the
‘‘first page of the Form DCO cover sheet
(up to and including the General
Information section)’’ will be made
public. The Commission is also
proposing to revise the provision to
include specific references to the Form
DCO exhibits that will be made public.
Finally, the Commission is proposing
to adopt new § 39.3(a)(6), which would
permit the Commission to extend the
180-day review period for DCO
applications specified in § 39.3(a)(1) for
any period of time to which the
applicant agrees in writing. This
provision would be similar to
§ 40.5(d)(2), which allows the
Commission to extend the review period
for rules submitted for Commission
review and approval, if the registered
entity that submitted the rule agrees in
writing. The Commission believes it is
important to have the ability to extend
the review period for a DCO application
so that, in the event that any issues or
concerns arise that cannot be resolved
in a timely manner, the Commission
does not find itself in the position of
having to deny the application.
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2. Stay of Application Review—§ 39.3(b)
Regulation 39.3(b)(2) provides for
delegation to the Director of the
Division, with the concurrence of the
General Counsel, the authority to notify
an applicant ‘‘seeking designation under
section 6(a) of the [CEA]’’ that the
application is materially incomplete and
the running of the 180-day period is
stayed. By its terms, section 6(a) of the
CEA applies only to designation of
contract markets. However, under
§ 39.3(a), the Commission applies the
same procedures to DCO applications.
Because DCOs are ‘‘registered’’ and not
‘‘designated,’’ the Commission is
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substituting ‘‘registration’’ for
‘‘designation’’ in § 39.3(b)(2).
3. Amendment of an Order of
Registration—§ 39.3(a)(2)
Regulation 39.3(a)(2) specifies that
any person seeking to register as a DCO,
any applicant amending its pending
application, and any registered DCO
seeking to amend its order of
registration must submit to the
Commission a completed Form DCO,
which must include a cover sheet, all
applicable exhibits, and any
supplemental materials, including
amendments thereto, as provided in
appendix A to part 39. The Form DCO
instructions correspond to this
requirement and currently specify that
requests for amending a registration
order and any associated exhibits must
be submitted via Form DCO.
The Commission is proposing to
change the requirements regarding a
DCO’s request to amend an order of
registration. First, the Commission
proposes to amend § 39.3(a)(2) and
Form DCO to eliminate the required use
of Form DCO to request an amended
order of registration from the
Commission. Under current practice, a
DCO is permitted to file a request for an
amended order with the Commission
rather than submitting Form DCO.
Commission staff typically will review
the request, obtain additional
information from the DCO where
necessary, and subsequently
recommend to the Commission whether
to grant or deny the amended order.
Given current practice, the Commission
believes that an updated Form DCO is
not needed to request an amended order
of registration. Second, the Commission
proposes to amend § 39.3(a)(4) to state
that an applicant only needs to file
amended exhibits and other information
when filing a Form DCO to update a
pending application.
Consistent with existing Commission
practice and the proposal to eliminate
the use of Form DCO to request an
amended registration order, the
Commission is proposing new § 39.3(d)
to establish a separate process for such
requests. A DCO would be required to
provide the Commission with any
additional information and
documentation necessary to review a
request to amend an order of
registration. The Commission would
issue an amended order if the
Commission determines that the DCO
would continue to maintain compliance
with the Act and the Commission’s
regulations after such an amendment.
Further, the Commission may also issue
an amended order of registration subject
to conditions. The Commission also
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22229
proposes to specify that it may decline
to issue an amended order based upon
a determination that the DCO would not
continue to maintain compliance with
the Act and the Commission’s
regulations upon such amendment.
4. Dormant Registration—§ 39.3(d)
Regulation 39.3(d) establishes the
procedure for a dormant DCO to
reinstate its registration before it can
begin ‘‘listing or relisting’’ products for
clearing. The Commission is proposing
to replace ‘‘listing or relisting’’ with
‘‘accepting’’ to more accurately describe
a DCO’s activities. The Commission also
proposes to renumber § 39.3(d) as
§ 39.3(e).
5. Vacation of Registration—§ 39.3(e)
Section 7 of the CEA and § 39.3(e) of
the Commission’s regulations permit a
DCO to request that the Commission
vacate its registration. Orders of
vacation of registration issued by the
Commission have included
requirements based on section 7 of the
CEA and other Commission regulations
that are not specifically listed in
§ 39.3(e). The Commission is proposing
to amend § 39.3(e) to codify these
requirements and provide greater
transparency to any DCO that is
considering vacating its registration. To
implement the proposed changes, the
Commission is proposing to renumber
current § 39.3(e) as § 39.3(f)(1).
Section 7 of the CEA requires any
registered entity that wishes to have its
registration vacated to make a written
request to the Commission. Section 7
also requires that the request be made at
least 90 days prior to the date on which
the registered entity wants the vacation
to take effect. The Commission is
proposing to adopt § 39.3(f)(1)(i) to
specifically require a DCO to state in its
request the date it wishes to have its
registration vacated and to make the
request at least 90 days prior to that
date.
The Commission is also proposing to
adopt § 39.3(f)(1)(ii) to require a DCO to
state in its request how it intends to
transfer or otherwise unwind all open
positions at the DCO. Under the
proposed rule, any actions to transfer or
unwind positions would be required to
reflect the interests of affected clearing
members and their customers. The
Commission believes this requirement
will help ensure that a DCO that plans
to voluntarily cease its clearing activity
will do so with minimal disruptions to
its members and the markets it serves.
The Commission is proposing to
adopt § 39.3(f)(1)(iii) and (iv) to require
a DCO to continue to maintain its books
and records after its registration has
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6. Request for Transfer of Registration
and Open Interest—§ 39.3(f)
Regulation 39.3(f) establishes
procedures that a DCO must follow to
request the transfer of its DCO
registration and positions comprising
open interest for clearing and
settlement, in anticipation of a corporate
change. Regulation 39.3(f) also pertains
to instances in which a corporate
change results in the transfer of all or
substantially all of a DCO’s assets to
another legal entity.
Commission staff has found that the
requirements of § 39.3(f) have created
confusion for DCOs which merely want
to convert the DCO from one type of
legal entity to another or change the
place of domicile for the DCO’s legal
entity without changing the DCO’s
operations or transferring the DCO’s
registration to new ownership. The
Commission also recognizes that a
transfer of open interest would not
necessarily be tied to a corporate
change.17 For example, a DCO may wish
to transfer open interest to another DCO
that is also a subsidiary of the same
parent company, or to another DCO in
connection with ceasing its clearing
services for a particular product.
To separate the procedures for a
request to transfer open interest from
those procedures to report a change to
the DCO’s corporate structure or
ownership, the Commission is
proposing changes to § 39.3(f), to be
renumbered as § 39.3(g), to simplify the
requirements for requesting a transfer of
open interest and remove references to
transfers of registration and
requirements regarding corporate
changes. Proposed § 39.3(g) would only
apply to instances in which a DCO
requests to transfer its open interest.
Changes to the DCO’s ownership would
continue to be addressed under
§ 39.19(c)(4)(viii) (proposed to be
renumbered as § 39.19(c)(4)(ix)).
Additionally, as discussed further
below, the Commission is proposing to
require a DCO to report a change to the
legal name under which it operates in
proposed § 39.19(c)(4)(xi). The
Commission is also proposing
conforming changes to § 39.19(c)(4)(ix)
to remove cross-references to § 39.3(f).
Under the proposed amendments to
§ 39.3(g), a DCO seeking to transfer its
open interest would be required to
submit rules for Commission approval
pursuant to § 40.5,18 rather than
submitting a request for an order at least
three months prior to the anticipated
transfer. In an effort to simplify the
existing requirements, the proposed
change would permit the transfer to take
effect after a 45-day Commission review
period. The 45-day review period would
be intended to ensure that clearing
members are made aware of the
intended transfer and to determine
whether the transferee DCO is suitable
to take on the transfer 19 and would be
15 To accommodate the proposed changes, the
Commission is proposing to include this sentence
as part of § 39.3(f)(1).
16 The requirement to send a copy of the notice
and order was first included in section 7 in 1922.
The Grain Futures Act, Public Law 67–331 ch. 369,
sec. 7, 42 Stat. 1002 (1922). Section 7 was most
recently amended in 2000, to cover all types of
registered entities, including DCOs. Commodity
Futures Modernization Act of 2000, Public Law
106–554, Title I, sec. 123(a)(17), 114 Stat. 2763
(2000).
17 The Commission notes, however, that a transfer
of open interest in this regard would not be in the
context of a default, which would typically involve
a DCO transferring positions from one FCM to
another FCM.
18 SIDCOs should consider whether the facts and
circumstances of the approval sought pursuant to a
§ 40.5 filing also obligate a SIDCO to file a § 40.10
submission.
19 The Commission notes that, under the existing
framework, positions cleared for U.S. customers
must be cleared by a registered DCO, while
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been vacated for the requisite statutory
and regulatory retention periods, and to
require a DCO to make all such books
and records available for inspection by
any representative of the Commission or
the United States Department of Justice
after its registration has been vacated, as
set forth in § 1.31 of the Commission’s
regulations. The Commission has
included this requirement in previous
orders of vacation based on § 39.3(f),
which states that a vacation of
registration ‘‘shall not affect any action
taken or to be taken by the Commission
based upon actions, activities or events
occurring during the time that the entity
was registered with the Commission.’’ 15
The Commission is proposing this
requirement to further ensure that a
DCO does not destroy its books and
records in order to hinder or avoid
Commission action following the
vacation of its registration.
Finally, section 7 of the CEA requires
the Commission to ‘‘forthwith send a
copy’’ of the notice that was filed with
the Commission requesting vacation and
the order of vacation to all other
registered entities. The Commission is
proposing to adopt § 39.3(f)(2) to specify
that this requirement will be met by
posting the required documents on the
Commission’s website. This provision
was written and amended before the
internet expanded to its current form
and level of access.16 The Commission
believes that posting the required
documents on its website is the most
effective and efficient way of providing
the required information to all
registered entities, as well as the public.
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able to continue to operate in
compliance with the CEA and the
Commission’s regulations. As part of its
submission pursuant to § 40.5, the DCO
would be required to include: (1) The
underlying agreement that governs the
transfer; (2) a description of the transfer,
including the reason for the transfer and
its impact on the rights and obligations
of clearing members and market
participants holding positions that
comprise the DCO’s open interest; (3) a
discussion of the transferee’s ability to
comply with the CEA, including the
DCO Core Principles, and the
Commission’s regulations thereunder;
(4) the transferee’s rules marked to show
changes that would result from
acceptance of the transferred positions;
(5) a list of products for which the DCO
requests transfer of open interest; and
(6) a representation by the transferee
that it is in and will maintain
compliance with the CEA, including the
DCO Core Principles, and the
Commission’s regulations thereunder
upon transfer of the open interest.
C. Procedures for Implementing DCO
Rules and Clearing New Products
1. Request for Approval of Rules—
§ 39.4(a)
Regulation 39.4(a) specifies that an
applicant for registration or a registered
DCO may request, pursuant to the
procedures set forth in § 40.5, that the
Commission approve any or all of its
rules prior to their implementation. In
practice, the Commission’s review of
applications for DCO registration
includes review of the applicant’s rules,
which are required to be submitted as
Exhibit A–2 to Form DCO. The
Commission’s issuance of an order of
registration as a DCO constitutes an
approval of the applicant’s rules that
were submitted as part of the
application. Accordingly, the
Commission is proposing to delete the
reference in § 39.4(a) to an applicant for
registration, as it is unnecessary for an
applicant to separately request approval
of its rules.
2. Portfolio Margining—§ 39.4(e)
Regulation 39.4(e) establishes certain
procedural requirements that apply to a
DCO seeking approval for a futures
account portfolio margining program.
Under § 39.4(e), a DCO seeking to
provide a portfolio margining program
under which securities would be held in
proprietary positions of U.S. persons may be
cleared by registered or exempt DCOs. As a result,
the Commission would need to ensure that the
positions are transferred to an entity that is
appropriately registered or exempt from DCO
registration.
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a futures account is required to petition
the Commission for an order ‘‘under
section 4d of the [CEA].’’ To conform
terminology to other provisions in part
39 which distinguish between futures
accounts subject to section 4d(a) of the
CEA and cleared swaps accounts subject
to section 4d(f) of the CEA, the
Commission is proposing to substitute
‘‘section 4d(a)’’ for ‘‘section 4d’’ in
§ 39.4(e).
IV. Amendments to Part 39—Subpart
B—Compliance With Core Principles
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A. Compliance With Core Principles—
§ 39.10
1. Chief Compliance Officer—§ 39.10(c)
Regulation 39.10(c)(1)(ii) requires that
a DCO’s chief compliance officer (CCO)
report to the board of directors or the
senior officer of the DCO. The
Commission recognizes that a legal
entity registered as a DCO may engage
in substantial activities not related to
clearing, in which case it may be more
appropriate for the CCO to report to the
senior officer responsible for the DCO’s
clearing activities. For example,
traditionally, exchanges have had
clearing operations as a component of
their overall structure. In some
instances, the exchange is the same legal
entity as the DCO, and therefore, the
senior officer of the entity would not
necessarily be focused on the clearing
operations. In light of this, the
Commission is proposing to amend
§ 39.10(c)(1)(ii) to permit the CCO to
report to the senior officer responsible
for the DCO’s clearing activities. The
Commission also is proposing to amend
§ 39.10(c)(4)(i) to permit the CCO to
submit the annual report (which is
discussed below) to the senior officer
responsible for the DCO’s clearing
activities.20
Regulation 39.10(c)(3)(i) requires the
CCO to prepare an annual report that
contains a description of the DCO’s
written policies and procedures,
including the code of ethics and conflict
of interest policies. The Commission is
proposing to amend this requirement to
allow a DCO to incorporate by reference
the parts of its most recent CCO annual
report containing such description, to
the extent that the DCO’s written
policies and procedures have not
materially changed since they were
most recently described in a previously
submitted CCO annual report. This is
intended to help make the process of
20 Regulation 39.10(c)(3) also requires the CCO to
‘‘provide the annual report to the board of directors
or the senior officer.’’ Because this requirement is
set forth in greater detail in § 39.10(c)(4)(i), the
Commission is proposing to remove, rather than
amend, the language in § 39.10(c)(3).
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preparing the CCO annual report more
efficient by not requiring the report to
repeat potentially lengthy descriptions
of policies and procedures that have
already been described in a CCO annual
report previously submitted to the
Commission. However, to ensure that
the descriptions remain current and
easily accessible, the Commission is
proposing to allow this incorporation by
reference only to a CCO annual report
submitted to the Commission within the
five-year period prior to the date of the
CCO annual report containing such
incorporation by reference. The
Commission believes that this
timeframe is appropriate given the
record retention requirements of § 39.20.
The Commission wishes to stress that
this ability to incorporate by reference
only applies to descriptions of policies
and procedures that have not materially
changed and does not apply to the
CCO’s assessment of their effectiveness
or other requirements outside of
§ 39.10(c)(3)(i).
The Commission also is proposing to
amend § 39.10(c)(3)(ii)(A), which
requires the CCO to prepare an annual
report that reviews each ‘‘core principle
and applicable Commission regulation,’’
and with respect to each, identifies the
compliance policies and procedures that
are designed to ensure compliance
‘‘with the core principle.’’ In order to be
consistent with the first part of the
requirement, the Commission is
proposing to change the language of the
second part to ‘‘with each core principle
and applicable regulation.’’ The
Commission is further proposing to
amend § 39.10(c)(3)(ii) to clarify that, for
SIDCOs and subpart C DCOs, this
includes the Commission’s regulations
in subpart C of part 39. In addition, the
Commission is further proposing to
require that the compliance policies and
procedures be identified ‘‘by name, rule
number, or other identifier’’ to clarify
that this provision is intended to require
the CCO annual report to clearly and
specifically identify the policies and
procedures intended to comply with
each core principle and applicable
regulation.
Finally, § 39.10(c)(4)(i) requires the
CCO to provide the annual report to the
board of directors or senior officer of the
DCO for review prior to submitting it to
the Commission. The Commission is
proposing to amend the provision to
require that this process be described in
the annual report, including providing
the date on which the report was
submitted to the board of directors or
senior officer. The Commission notes
that § 39.10(c)(4)(i) already requires the
submission of the report to the board of
directors or senior officer to be recorded
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22231
in the board of directors’ meeting
minutes or otherwise, as evidence of
compliance with this requirement.
However, the Commission believes that
it is reasonable to require similar
disclosure in the CCO annual report so
that compliance is evident outside the
context of an examination of the DCO’s
board of directors’ meeting minutes or
other records. The Commission notes
that some DCOs already describe this
process in the cover letter submitted
along with the CCO annual report, but
the Commission prefers that this
description appear in the annual report
itself or in an annex, schedule, or
exhibit attached to and included with
the annual report. The Commission is
also proposing to amend § 39.10(c)(4)(ii)
by removing the requirement that the
CCO annual report be submitted
concurrently with the DCO’s fiscal yearend audited financial statement, to be
consistent with a proposed change to
§ 39.19(c)(3)(iv) described below.
2. Enterprise Risk Management—
§ 39.10(d)
The Commission is proposing to add
new § 39.10(d) 21 to specifically provide
that a DCO is required to have a
program of enterprise risk management,
which would be defined in § 39.2 as an
enterprise-wide strategic business
process intended to identify potential
events that may affect the enterprise and
to manage the probability or impact of
those events on the enterprise as a
whole, such that the overall risk
remains within the enterprise’s risk
appetite and provides reasonable
assurance that the DCO can continue to
achieve its objectives, including
compliance with the CEA and
21 The Commission is proposing to place the
requirement for an enterprise risk management
program in § 39.10, which codifies Core Principle
A (pertaining to compliance with the DCO Core
Principles generally), to emphasize the broad
application of an enterprise risk management
program to a DCO’s operations and services. The
Commission previously declined to adopt an
enterprise risk management requirement applicable
to DCOs in a rulemaking pertaining to a specific
Core Principle—Core Principle I, ‘‘System
Safeguards’’—because such a requirement ‘‘must be
addressed in a more comprehensive fashion
involving more than the system safeguards context
alone, and thus are not appropriate for this
rulemaking.’’ See System Safeguards Testing
Requirements for Derivatives Clearing
Organizations, 81 FR 64322, 64332 (Sept. 19, 2016).
Other Commission regulations codify various
specific aspects of risk management. For example,
§ 39.13 codifies Core Principle D, which focuses on
market risk and credit risk; § 39.18 codifies Core
Principle I, which addresses system safeguards; and
§ 39.27 codifies Core Principle R, which addresses
legal risk. By including the enterprise risk
management requirement in § 39.10, the
Commission intends to underscore that a properly
designed and managed enterprise risk management
program covers all risks.
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Commission regulations. The proposed
definition is intended to be applicable
to a variety of corporate structures,
including stand-alone DCOs, legal
entities that are a DCO but also perform
other functions (such as a DCM), and
corporate groups that consist of a DCO
and legally separate but affiliated
entities.22
An enterprise risk management
program requires an entity to assess all
potential risks it faces, including but not
limited to systemic, cyber, legal, credit,
liquidity, concentration, general
business, operational, custody and
investment, conduct, financial,
reporting, compliance, governance,
strategic, and reputational risks. An
enterprise risk management program
also requires the entity to identify and
assess those risks on an enterprise-wide
basis, meaning that it must consider
whether individual risks across the
organization and its affiliates are
interrelated and may create a combined
exposure to the entity that differs from
the sum of the individual risks, and
must measure, monitor, and manage
such risks accordingly. Additionally, an
enterprise risk management program
requires an assessment of both the
nominal or inherent risk that exists
prior to the establishment of any risk
mitigation activities (i.e., controls) as
well as the residual risk that remains
once such mitigation activities or risk
responses are taken into account.
Existing Commission regulations
already require a DCO to manage its
risks.23 However, the Commission has
found that some DCOs lack a formal
enterprise risk management program
that addresses their risks on an
enterprise-wide basis. Therefore,
proposed § 39.10(d)(1) and (2) would
require a DCO to implement an
enterprise risk management program
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22 The
term ‘‘enterprise-wide’’ is intended to
require that the process of identifying, assessing,
measuring, monitoring, and managing risk apply to
the entire legal entity and its affiliates as a
collective whole, with the objective to manage the
risks to the DCO. A DCO would satisfy its
obligations under paragraph (d)(1) (and paragraphs
(d)(2) and (3), as discussed below) if it is part of
a corporate group that has in place an enterprise
risk management program that includes the DCO
within its scope and complies with the
requirements of this section.
23 For example, § 39.11(a) requires a DCO to
identify and adequately manage its general business
risks; § 39.13(a) requires a DCO to ensure that it
possesses the ability to manage the risks associated
with discharging the responsibilities of the DCO
through the use of appropriate tools and
procedures; and § 39.13(b) requires a DCO to
establish and maintain written policies, procedures,
and controls which establish an appropriate risk
management framework that, at a minimum, clearly
identifies and documents the range of risks to
which the DCO is exposed and addresses the
monitoring and management of the entirety of those
risks.
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and establish and maintain an
enterprise risk management framework.
Consistent with § 39.10(b), the
Commission does not intend to be
overly prescriptive by requiring specific
standards and methodologies. A DCO
should develop an enterprise risk
management program that works best
for its specific risk exposures, product
types, customer base, market segment,
and organizational structure, among
other things, as long as the program
meets the proposed minimum standards
and any other legal and regulatory
requirements.
Therefore, proposed § 39.10(d)(3)
would require a DCO to follow generally
accepted standards and industry best
practices with respect to the
development and ongoing monitoring of
its enterprise risk management
framework, assessment of the
performance of the enterprise risk
management program, and the
management and mitigation of risk to
the DCO. The Commission is mindful
that best practices evolve and change
over time and does not, therefore, wish
to prescribe specific standards in its
regulations.24
The Commission has observed that
some DCOs tend to ‘‘silo’’ responsibility
for complying with their statutory and
regulatory obligations given the diverse
nature of the relevant risks. For
example, risk management personnel
might be primarily responsible for
compliance with Core Principle D,
while information technology personnel
might be primarily responsible for
managing the risks addressed by Core
Principle I. To ensure that the enterprise
risk management program is managed
appropriately, the Commission is
proposing § 39.10(d)(4), which would
require a DCO to identify as its
enterprise risk officer an appropriate
individual that exercises the full
responsibility and authority to manage
24 In the interests of offering guidance to DCOs,
however, the Commission notes that standards
similar to those developed by the Committee of
Sponsoring Organizations of the Treadway
Commission or the International Organization for
Standardization are currently among those that
would reasonably be considered in the
development of an enterprise risk management
program. Although different standards may use
different terminology for the same concept, these
standards have some commonalities, such as the
statement of risk appetite and the use of a risk
register or logs to record any losses or risks above
a given threshold. These standards are noted here
to assist DCOs in identifying standards that they
may wish to adopt or consider in designing and
implementing their risk management frameworks;
there may be other internationally-recognized
standards that may be used in addition to or instead
of the standards mentioned above. In the interests
of transparency, a DCO should specify the
standards or industry best practices it uses as part
of its enterprise risk management program.
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the DCO’s enterprise risk management
function.25
The enterprise risk officer would be
required to have the authority,
independence, resources, expertise, and
access to relevant information necessary
to fulfil the responsibilities of such
position. The Commission believes that
the independence of the enterprise risk
officer is a critical factor in allowing
such officer to operate effectively and
has concerns about the potential for
senior officers to interfere with the
enterprise risk officer’s performance of
his or her responsibilities. The
Commission requests comment
regarding whether the enterprise risk
officer should be required to report
directly to the board of directors of the
organization for which the enterprise
risk officer is responsible for managing
the risks, whether such organization is
the DCO or its corporate parent or other
affiliate. The Commission also requests
comment as to whether a DCO’s chief
risk officer should be permitted to also
serve as its enterprise risk officer.
B. Financial Resources—§ 39.11
Regulation 39.11 implements Core
Principle B, which requires a DCO to
possess financial resources that, at a
minimum, exceed the total amount that
would enable the DCO to meet its
financial obligations to its clearing
members notwithstanding a default by
the clearing member creating the largest
financial exposure for the DCO in
extreme but plausible market conditions
and to cover its operating costs for a
period of one year, as calculated on a
rolling basis. The Commission is
proposing to revise or clarify several
aspects of § 39.11, including revising the
language of § 39.11(a) to make it more
consistent with Core Principle B.
1. Calculation of Largest Financial
Exposure and Stress Tests—
§ 39.11(a)(1), (c)(1) and (2).
Regulation 39.11(a)(1) requires a DCO
to maintain financial resources
sufficient to meet its financial
obligations to its clearing members
notwithstanding a default by the
clearing member creating the largest
financial exposure for the DCO in
extreme but plausible market
conditions. Regulation 39.11(c)(1)
requires a DCO to perform ‘‘stress
testing’’ in order to determine the
25 The Commission is proposing to require that
the DCO ‘‘identify,’’ rather than ‘‘designate,’’ the
enterprise risk officer because, for certain corporate
structures, the enterprise risk officer would most
appropriately be an officer of a parent or other
affiliate of the DCO. As a result, the DCO may not
always be the entity that may properly ‘‘designate’’
the enterprise risk officer.
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financial resources required to satisfy
§ 39.11(a)(1). As an initial matter, the
Commission is proposing to change the
wording to ‘‘stress tests’’ to use the term
defined in § 39.2. This is not intended
to change the meaning of § 39.11(c)(1).
Although § 39.11(c)(1) grants a DCO
reasonable discretion in determining the
methodology used to calculate its
financial resources requirement,
Commission staff has noted
inconsistencies in how DCOs treat
excess collateral on deposit when
conducting stress tests. These
inconsistencies lessen the usefulness of
the stress tests. Accordingly, the
Commission is proposing additional
minimum requirements that a DCO
would have to follow in determining its
exposure in accordance with
§ 39.11(c)(1).
In particular, the Commission is
proposing to add § 39.11(c)(2)(i)(A) 26 to
require a DCO to calculate its largest
financial exposure net of the clearing
member’s required initial margin
amount on deposit. In other words, the
DCO may not take into account excess
collateral on deposit or initial margin
required but not yet received. This
would focus a DCO’s analysis on the
resources that would actually be
available to the DCO during times of
stress and is consistent with recent
guidance issued by CPMI–IOSCO
suggesting that when assessing the
adequacy of their financial resources,
CCPs should take into account only
prefunded financial resources and
ignore voluntary excess contributions.27
Consistent with this change, the
Commission is proposing to remove
§ 39.11(b)(1)(i), which permits margin to
be used to satisfy the requirements of
§ 39.11(a)(1), because the required
initial margin amount on deposit for the
clearing member will be applied before
determining the largest financial
exposure for the DCO in extreme but
plausible market conditions. Therefore,
the margin would not be available to
also cover the exposure.
Additionally, the Commission is
proposing § 39.11(c)(2)(ii) to require that
when stress tests produce losses in both
customer and house accounts, a DCO
must combine the customer and house
stress test losses of each clearing
member using the same stress test
scenario.
Finally, the Commission is proposing
several provisions designed to ensure
customer funds are treated properly
26 The
Commission is proposing to renumber
current § 39.11(c)(2) as § 39.11(c)(3).
27 See CPMI–IOSCO, Resilience of central
counterparties: Further guidance on the PFMI (July
2017), Principles 4.2.4, 4.2.5, available at https://
www.bis.org/cpmi/publ/d163.pdf.
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when a DCO is calculating its largest
financial exposure. Proposed
§ 39.11(c)(2)(i)(B) would require a DCO
to use customer initial margin only to
the extent permitted by parts 1 and 22
of the Commission’s regulations.
Proposed § 39.11(c)(2)(iii) would clarify
that when calculating its largest
financial exposure, a DCO may net any
gains in the house account with
customer losses, if permitted by the
DCO’s rules; however, a DCO may not
net losses in the house account with
gains in the customer account. Proposed
§ 39.11(c)(2)(iv) would further clarify
that, with respect to a clearing member’s
cleared swaps customer account, a DCO
may net gains for one customer against
losses for another customer only to the
extent permitted by the DCO’s rules.
2. Assessments—§ 39.11(d)(2)
Regulation 39.11(d)(2) sets out certain
conditions that apply to a DCO’s use of
assessments for additional guaranty
fund contributions in calculating the
financial resources available to meet its
obligations under § 39.11(a)(1).
Regulation 39.11(d)(2)(iv) provides that
the DCO shall only count the value of
assessments, after a 30 percent haircut,
‘‘to meet up to 20 percent of those
obligations.’’ The Commission has been
advised that the phrase ‘‘those
obligations,’’ which is a reference to the
obligations discussed in the
introductory language of § 39.11(d)(2),
has created some uncertainty. Therefore,
for clarity, the Commission is proposing
to replace the phrase ‘‘those
obligations’’ with ‘‘the total amount
required under paragraph (a)(1) of this
section.’’
3. Liquidity of Financial Resources—
§ 39.11(e)
Regulation 39.11(e)(1)(ii) requires that
the financial resources allocated by a
DCO to meet the requirements of
§ 39.11(a)(1) (i.e., its default resources)
be sufficiently liquid to enable the DCO
to fulfill its obligations as a central
counterparty during a one-day
settlement cycle. Regulation
39.11(e)(1)(ii) further requires that those
resources include cash, U.S. Treasury
obligations, or high quality, liquid,
general obligations of a sovereign nation
(i.e., cash or cash equivalents), in an
amount greater than or equal to the
average of its clearing members’ average
pays over the last fiscal quarter.28 If that
28 The Commission wishes to clarify that the cash,
U.S. Treasury obligations, or high quality, liquid,
general obligations of a sovereign nation required to
be held under § 39.11(e)(1)(ii) do not have to be
attributable to the DCO’s own capital but can be
attributable to any of the acceptable financial
resources included in § 39.11(a)(1).
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amount is less than what a DCO needs
to fulfill its obligations during a one-day
settlement cycle, § 39.11(e)(1)(iii)
permits a DCO to take into account a
committed line of credit for the purpose
of meeting the remainder of the
requirement.
The Commission’s intention was to
require that at least a portion of a DCO’s
default resources be sufficiently liquid
to enable the DCO to complete a oneday settlement cycle and that these
liquid resources include a certain
amount of cash or cash equivalents.
Then, if the cash or cash-equivalent
amount was not sufficient to meet the
total one-day settlement cycle liquidity
requirement, a DCO could use a
committed line of credit to make up the
difference.29 Regulation 39.11(b)(1),
however, which sets forth the types of
financial resources that can be
considered as default resources, does
not expressly permit the use of a
committed line of credit; 30 it does
permit the use of ‘‘[a]ny other financial
resource deemed acceptable by the
Commission.’’ The result is that
§ 39.11(b)(1) only permits a DCO to use
a committed line of credit as part of its
default resources if ‘‘deemed acceptable
by the Commission,’’ while
§ 39.11(e)(1)(iii) seems to permit a DCO
to use a committed line of credit as part
of its default resources up to the amount
needed to satisfy the ‘‘one-day
settlement cycle’’ liquidity requirement
after cash or cash equivalents have been
applied. Accordingly, the Commission
is proposing § 39.11(e)(3) to clarify that
a committed line of credit or similar
facility is a permitted default resource
up to the amount provided for in
§ 39.11(e)(1)(ii), provided, however, that
it is not counted twice to meet the
requirements of § 39.11(e)(1)(ii) and
§ 39.11(e)(2).31 The Commission is also
proposing clarifying changes to the text
of § 39.11(e)(1)(iii) and (e)(2).
In addition, the Commission is
proposing to change references to ‘‘daily
settlement pay’’ in § 39.11(e)(1)(ii) to
‘‘daily settlement variation pay’’ in
order to clarify that additional calls for
29 See Financial Resources Requirements for
Derivatives Clearing Organizations, 75 FR 63113,
63116 (Oct. 14, 2010) (proposed rule).
30 In the notice of proposed rulemaking for
§ 39.11, the Commission noted that a committed
line of credit or similar facility is not listed as a
financial resource available to a DCO to satisfy the
requirements of § 39.11(a)(1) and (2). The
Commission further noted that a DCO may use a
committed line of credit or similar facility only to
meet the liquidity requirements set forth in
§ 39.11(e)(1) and (2). Id. See also Derivatives
Clearing Organization General Provisions and Core
Principles, 76 FR at 69350 (affirming this
approach).
31 The Commission is proposing to renumber
current § 39.11(e)(3) as § 39.11(e)(4).
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initial margin should not be included in
the calculation.
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4. Reporting Requirements—§ 39.11(f)
Regulation 39.11(f) sets forth
reporting requirements for DCOs
concerning the financial resources they
are required to maintain pursuant to
§ 39.11(a). After § 39.11(f) was adopted,
the Commission adopted §§ 39.33(a) and
39.39(d), which set forth financial
resources requirements for SIDCOs and
subpart C DCOs, and financial resources
requirements for the recovery and winddown plans of SIDCOs and subpart C
DCOs, respectively. The Commission is
proposing to amend several provisions
of § 39.11(f) by adding the words ‘‘and
§§ 39.33(a) and 39.39(d), if applicable,’’
to clarify that financial resources
reporting by SIDCOs and subpart C
DCOs should encompass all financial
resources requirements applicable to
them under part 39.
5. Financial Statements—§ 39.11(f)(1)(ii)
Regulation 39.11(f)(1)(ii) requires a
DCO to file with the Commission each
fiscal quarter, or at any time upon
Commission request, a financial
statement, including the balance sheet,
income statement, and statement of cash
flows, of the DCO or of its parent
company. Since § 39.11(f)(1)(ii) was
implemented, some DCOs have filed the
financial statements of their parent
companies. Because some of these DCOs
are part of a complex corporate
structure, Commission staff has had
difficulty determining whether the
entity covered by a particular financial
statement is the true, direct parent of the
relevant DCO, which, in turn, makes it
difficult to accurately assess the
financial strength of the DCO. Therefore,
the Commission is proposing to revise
§ 39.11(f)(1)(ii) to require that the
financial statement provided be that of
the DCO and not the parent company.
In further regard to § 39.11(f)(1)(ii),
the Commission has received many
inquiries concerning the accounting
standards that apply to the preparation
of the DCO’s financial statements.
Generally, Commission regulations
require financial statements to be
prepared in accordance with U.S.
generally accepted accounting
principles (U.S. GAAP).32 Therefore, the
Commission would expect DCOs to
provide financial statements prepared in
accordance with U.S. GAAP. However,
the Commission recognizes that DCOs
organized outside the United States may
prepare their financial statements in
accordance with International Financial
32 See, e.g., §§ 1.10(d)(3), 4.22(d), and
38.1101(b)(1).
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Reporting Standards (IFRS) issued by
the International Accounting Standards
Board (IASB), or pursuant to other
country-specific accounting standards.
The Commission has permitted
commodity pool operators to file
commodity pool financial statements
prepared in accordance with IFRS if the
pool is organized under the laws of a
foreign jurisdiction, and certain other
conditions are met.33
The Commission notes that the
Securities and Exchange Commission
(SEC) has adopted financial reporting
requirements for securities clearing
agencies that require U.S. GAAP, but
permit the use of IFRS by clearing
agencies that are ‘‘incorporated or
organized under the laws of any foreign
country.’’ 34 The SEC stated in its
adopting release that it also recognizes
the ‘‘advantages of financial statement
disclosure that are limited to more
widely applied bases of accounting and
may offer more utility to market
participants, regulators, and other
stakeholders of clearing agencies.’’ 35
Therefore, it limited the different bases
of accounting upon which annual
audited financial statements may be
prepared to IFRS and U.S. GAAP.36
The Commission therefore is
proposing to revise § 39.11(f)(1)(ii) to
clarify that the financial statement must
be prepared in accordance with U.S.
GAAP for DCOs incorporated or
organized under U.S. law, and in
accordance with either U.S. GAAP or
IFRS issued by the IASB for DCOs
incorporated or organized under the
laws of any foreign country.
In reviewing DCOs’ financial
statements, Commission staff has noted
that assets allocated by the DCO to meet
the requirements of § 39.11(a)(1) or (2)
often are not identified accordingly. The
Commission therefore is proposing in
§ 39.11(f)(1)(ii) and (f)(2)(i) (discussed
below) to require that assets allocated by
the DCO for such purpose must be
clearly identified on the DCO’s balance
sheet as held for that purpose.
In addition, the Commission is
proposing to renumber current
§ 39.11(f)(2) as § 39.11(f)(1)(iv) and
amend it to incorporate the language of
current § 39.11(f)(4), which requires a
DCO to submit its quarterly financial
report no later than 17 business days
after the end of the DCO’s fiscal quarter
or at a later time as permitted by the
Commission in its discretion in
33 See
§ 4.22(d)(2).
CFR 240.17Ad–22(c)(2)(ii).
35 Clearing Agency Standards, 77 FR 66220,
66244 (Nov. 2, 2012) (final rule).
36 See id.
34 17
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response to a DCO’s request for an
extension.
6. Annual Reporting—§ 39.11(f)(2)
The Commission is proposing to
revise § 39.11(f)(2) to set forth a DCO’s
annual financial reporting requirements
(currently set forth in § 39.19(c)(3)(ii),
which would also be revised) in the
same way § 39.11(f)(1) sets forth a DCO’s
quarterly financial reporting
requirements (which are crossreferenced in § 39.19(c)(2)).
In addition to its audited year-end
financial statement, a DCO would be
required to submit: (1) A reconciliation,
including appropriate explanations, of
its balance sheet when material
differences exist between it and the
balance sheet in the DCO’s financial
statement for the last quarter of the
fiscal year or, if no material differences
exist, a statement so indicating, and (2)
such further information as may be
necessary to make the statements not
misleading. Commission staff has
encountered situations in which
significant discrepancies exist between
a DCO’s financial statements for the last
quarter of its fiscal year and its audited
year-end financial statement. There is
often a simple explanation for this, e.g.,
the discrepancies reflect a material
change in a given foreign exchange rate.
The Commission believes a
reconciliation will help explain these
discrepancies and will aid its review of
the DCO’s financial statements.
7. Documentation Requirements—
§ 39.11(f)(3)
Current § 39.11(f)(3) requires a DCO to
provide to the Commission certain
documentation related to its quarterly
financial reporting.37 The Commission
has determined that requiring this
documentation each quarter is
unnecessary where there is no change
from the prior submission. Therefore,
the Commission is proposing to revise
§ 39.11(f)(3) to clarify that a DCO must
send the documentation to the
Commission required under current
paragraphs (f)(3)(i) and (ii) (proposed to
be renumbered as paragraphs (f)(3)(i)(A)
and (i)(B)) only upon the DCO’s first
submission under § 39.11(f)(1) and in
the event of any change thereafter.
The Commission also is proposing to
renumber § 39.11(f)(3)(iii), which
concerns providing copies of
agreements establishing or amending a
credit facility, insurance coverage, or
other arrangement, as § 39.11(f)(3)(ii),
37 The documentation explains (1) the
methodology used to compute financial resources
requirements, and (2) the basis for the DCO’s
determinations regarding valuation and liquidity
requirements.
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and add language specifying that copies
of the agreements should evidence or
support the DCO’s ability to meet
applicable financial resources and
liquidity resources requirements.
8. Certification—§ 39.11(f)(4)
After § 39.11 was adopted, the
Division advised DCOs that the
quarterly financial report required
under paragraph (f) should be
accompanied by a certification as to the
accuracy of the report signed by the
person responsible for the accuracy and
completeness of the report.38 Such
certification is required for submission
of annual chief compliance officer
reports and Form 1–FR by FCMs, and is
also appropriate in these
circumstances.39 The Commission is
proposing to amend § 39.11(f)(4) to add
this new requirement.
C. Participant and Product Eligibility—
§ 39.12
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Regulation 39.12 implements Core
Principle C, which requires a DCO to
establish admission and continuing
eligibility standards for its members, as
well as standards for determining the
eligibility of agreements, contracts, or
transactions submitted to the DCO for
clearing. Several provisions in § 39.12
require a DCO to ‘‘adopt’’ or ‘‘establish’’
rules. The Commission is proposing to
amend those provisions to require a
DCO to ‘‘have’’ rules.40
Regulation 39.12(b)(2) provides that a
DCO shall adopt rules providing that all
swaps with the same terms and
conditions are economically equivalent
within the DCO. The Commission
recognizes that some DCOs do not clear
swaps and it was not the intention of
the Commission to require DCOs that do
not clear swaps to adopt the rules
required under this provision.
Therefore, the Commission is proposing
to revise § 39.12(b)(2) so that it
explicitly applies only to DCOs that
clear swaps.
38 Memorandum to All Registered DCOs from
Ananda Radhakrishnan, Director, Division of
Clearing and Risk, June 7, 2012.
39 See 17 CFR 39.10(c)(4)(ii) (requiring
certification of annual reports by chief compliance
officers); 17 CFR 1.10(d)(4) (requiring certification
of financial reports submitted by FCMs and
introducing brokers); see also 17 CFR 4.22(h)
(requiring commodity pool operators to certify
periodic and annual financial reports); 17 CFR
4.27(e)(1) (requiring commodity pool operators and
commodity trading advisors to certify periodic
reports).
40 The Commission is also proposing to renumber
paragraphs (a)(5)(i)(A) and (B) and (a)(5)(ii) of
§ 39.12(a)(5) as paragraphs (a)(5)(ii), (iii), and (iv),
respectively.
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D. Risk Management—§ 39.13
Regulation 39.13 implements Core
Principle D, which establishes risk
management standards for DCOs. The
Commission is proposing to clarify
several aspects of § 39.13.
1. Risk Management Framework—
§ 39.13(b)
Regulation 39.13(b) requires a DCO to
establish and maintain written policies,
procedures, and controls, approved by
its board of directors, which establish an
appropriate risk management
framework. The introductory heading to
this provision states that it is a
‘‘[d]ocumentation requirement.’’ The
Commission is proposing to replace
‘‘[d]ocumentation requirement’’ with
‘‘[r]isk management framework’’ and is
also proposing to replace the words
‘‘establish and maintain’’ with ‘‘have
and implement’’ to make it clear that a
DCO is not only required to have a
documented risk management
framework but to put it into action.
2. Limitation of Exposure to Potential
Default Losses—§ 39.13(f)
Regulation 39.13(f) requires a DCO to
limit its exposure to potential losses
from clearing member defaults to
‘‘ensure’’ that the DCO’s operations
would not be disrupted and nondefaulting clearing members would not
be exposed to unanticipated or
uncontrollable losses. The Commission
recognizes that a DCO cannot ensure
protection from that which it cannot
anticipate. Therefore, the Commission is
proposing to replace ‘‘ensure’’ with
‘‘minimize the risk’’ and make
conforming changes to paragraphs (f)(1)
and (2) of § 39.13.
3. Margin Requirements—§ 39.13(g)
a. Methodology and Coverage—
§ 39.13(g)(2)
Regulation 39.13(g)(2)(i) requires that
a DCO have initial margin requirements
that are commensurate with the risks of
each product and portfolio, including
any unusual characteristics of, or risks
associated with, particular products or
portfolios. The regulation currently
notes that such risks ‘‘include[ ] but [are]
not limited to jump-to-default risk or
similar jump risk.’’ The Commission is
proposing to amend § 39.13(g)(2)(i) to
note that such risks also include
‘‘concentration of positions.’’ Recent
events, including a significant loss from
a default at a central counterparty
outside of the Commission’s
jurisdiction, highlight the importance of
addressing those risks.
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b. Independent Validation—§ 39.13(g)(3)
Regulation 39.13(g)(3) requires that a
DCO’s systems for generating initial
margin requirements, including its
theoretical models, be reviewed and
validated by a qualified and
independent party on a regular basis.
The provision further provides that the
validation may be conducted by
independent contractors or employees
of the DCO, as long as they are not
responsible for the development or
operation of the systems and models
being tested. The Commission is
proposing to amend this provision to
specify that ‘‘on a regular basis’’ means
annually and to also permit employees
of an affiliate of the DCO to conduct the
validations. Based on experience since
the provision was adopted, the
Commission believes an annual
validation is sufficient. The Commission
also believes it is appropriate to permit
employees of an affiliate of the DCO to
conduct the validations because, as with
independent contractors or employees
of the DCO, the main concern is that
they not be persons responsible for
development or operation of the systems
and models being tested.
c. Spreads and Portfolio Margins—
§ 39.13(g)(4)
The Commission is amending
§ 39.13(g)(4) to substitute the phrase
‘‘conceptual basis’’ for the phrase
‘‘theoretical basis’’ in the discussion of
spread margin. This change would not
alter the meaning of the rule but would
simply make the terminology consistent
with that used in the other Commission
regulations.41
d. Back Tests—§ 39.13(g)(7)
The Commission is proposing new
§ 39.13(g)(7)(iii) to clarify that, in
conducting back tests of initial margin
requirements, a DCO should compare
portfolio losses only to those
components of initial margin that
capture changes in market risk factors.
e. Gross Customer Margin—
§ 39.13(g)(8)(i)
Regulation 39.13(g)(8)(i) requires a
DCO to collect initial margin on a gross
basis for each clearing member’s
customer account(s). After the
regulation was adopted, Division staff
received several inquiries regarding
whether the provision applied to
intraday settlements as well as end-ofday settlements. In response, the
Division advised DCOs that the
provision requires a DCO to collect
41 See Margin Requirements for Uncleared Swaps
for Swap Dealers and Major Swap Participants, 81
FR 636, 658 (Jan. 6, 2016).
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customer initial margin on a gross basis
during any settlement cycle (end-of-day
or intraday) in which the DCO collects
customer initial margin. The Division
also asked DCOs to notify the Division,
in writing, of any issues that could
prevent a DCO from fully complying
with this requirement.42
Although § 39.13(g)(8)(i) does not
differentiate between end-of-day and
intraday collections of customer initial
margin, there are significant operational
issues that may affect the ability of
clearing members to accurately
determine the positions of individual
customers on an intraday basis with
respect to certain types of transactions
(e.g., transfers, give-ups, and allocations
of block orders) and with respect to
certain types of market participants
(e.g., locals and high frequency traders).
Therefore, intraday gross margin
calculations may result in some clearing
members being charged too much
margin and others being charged too
little margin, which could necessitate
significant end-of-day adjustments.
Regulation 39.13(g)(8)(i) is premised
upon the ability of a DCO to accurately
determine the initial margin amounts
that would be required for each
individual customer if each individual
customer were a clearing member.
Accordingly, the Commission is
proposing to amend § 39.13(g)(8)(i) to
require a DCO to collect customer initial
margin from its clearing members on a
gross basis only during its end-of-day
settlement cycle, in light of the
operational issues that may arise
intraday. However, the Commission
strongly encourages DCOs to collect
customer initial margin from their
clearing members on a gross basis
during any intraday settlement cycle in
which the DCOs collect customer initial
margin, if they are able to calculate the
margin accurately. The Commission
requests comment as to whether this is
the correct approach or whether there
are other alternatives that would
address the collection of intraday gross
margin.
Currently, § 39.13(g)(8)(i)(B) provides
that for purposes of calculating the gross
initial margin requirement for clearing
members’ customer accounts, to the
extent not inconsistent with other
Commission regulations, a DCO may
require its clearing members to report
the gross positions of each individual
customer to the DCO, or it may permit
each clearing member to report the sum
of the gross positions of its customers to
the DCO. Regulation 39.13(g)(8)(i)(C)
42 Memorandum to All Registered DCOs from
Ananda Radhakrishnan, Director, Division of
Clearing and Risk, July 19, 2012.
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further provides that for purposes of
paragraph (g)(8), a DCO may rely, and
may permit its clearing members to rely,
upon the sum of the gross positions
reported to the clearing members by
each domestic or foreign omnibus
account that they carry, without
obtaining information identifying the
positions of each individual customer
underlying such omnibus accounts. In
addition, § 39.19(c)(5)(iii) currently
requires a DCO to file with the
Commission, for each customer origin of
each clearing member, the end-of-day
gross positions of each beneficial owner,
upon Commission request.
The Commission believes the ability
to analyze positions at the customer
level is a crucial element of an effective
risk surveillance program. For example,
a clearing member account that is
composed of 1,000 customers each
holding one contract poses substantially
less financial risk to the clearing
member and to the DCO than a clearing
member account composed of one
customer holding 1,000 contracts. The
ability to identify those customers
whose positions create the most risk to
a DCO’s clearing members would assist
the Commission in determining whether
adequate measures are in place to
address those risks and whether the
Commission needs to take proactive
steps to see that those risks are
mitigated.
When the part 39 regulations were
adopted, the Commission determined to
allow a DCO to permit its clearing
members to report the sum of the gross
positions of their customers to the DCO
without obtaining information
identifying the positions of each
individual customer underlying such
clearing members’ omnibus accounts.
The Commission also determined not to
require routine reporting of end-of-day
gross positions of each beneficial owner
to the Commission, in part because of
concerns about the difficulty that DCOs
would have in obtaining this
information.43 Subsequently, however,
the Commission adopted § 22.11(c),
which requires FCMs to report customer
information about swaps to DCOs.44
Thus, for swaps, DCOs now have data
that they did not have fully available to
them at the time part 39 was adopted.
Moreover, the Commission has
established a reporting protocol for this
43 Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR at 69375,
69400.
44 Protection of Cleared Swaps Customer
Contracts and Collateral; Conforming Amendments
to the Commodity Broker Bankruptcy Provisions, 77
FR 6336, 6376 (Feb. 7, 2012) (codified at 17 CFR
22).
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data, which can be used for submitting
futures data as well.
To avoid a potential regulatory gap,
the Commission is proposing to require
a DCO to have rules requiring its
clearing members to report customer
information about futures (as well as
swaps) to DCOs. This will enable DCOs,
in turn, to report this information to the
Commission, as discussed further below
with respect to the proposed
amendment to § 39.19(c)(1)(i)(D).
Specifically, the proposed amendments
to § 39.13(g)(8)(i)(B) would require a
DCO to have rules that require its
clearing members to provide reports to
the DCO each day setting forth end-ofday gross positions of each beneficial
owner within each customer origin of
the clearing member.45
f. Customer Initial Margin
Requirements—§ 39.13(g)(8)(ii)
Regulation 39.13(g)(8)(ii) provides
that a DCO must require its clearing
members to collect customer initial
margin from their customers, ‘‘for nonhedge positions, at a level that is greater
than 100 percent of the [DCO]’s initial
margin requirements with respect to
each product and swap portfolio.’’
Historically, DCMs had set customer
initial margin requirements for their
FCM members,46 and the Commission
stated that this provision simply shifts
the responsibility for establishing
customer initial margin requirements
from DCMs to DCOs.47 The Commission
also noted its belief that requiring an
FCM to collect higher customer initial
margin for ‘‘non-hedge positions’’
provides a valuable cushion of readily
available customer margin collateral.48
After § 39.13(g)(8)(ii) was adopted, the
Division issued interpretative guidance
addressing several aspects of the
regulation in response to a request from
Chicago Mercantile Exchange, Inc.
(CME), a registered DCO.49 The
Commission is proposing to amend
§ 39.13(g)(8)(ii) in a manner consistent
45 In this regard, the Commission is also
proposing to amend § 39.13(g)(8)(i)(B) by changing
‘‘may’’ to ‘‘shall,’’ deleting ‘‘to the extent not
inconsistent with other Commission regulations’’
and ‘‘or it may permit each clearing member to
report the sum of the gross positions of its
customers to the derivatives clearing organization,’’
deleting paragraph (C), and renumbering paragraphs
(D) and (E).
46 The Commission is proposing to amend
§ 39.13(g)(8)(ii) and (iii) to clarify that these
provisions apply to FCM clearing members only.
47 Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR at 69377.
48 Id. at 69378.
49 CFTC Letter No. 12–08 (Sept. 14, 2012); see
also Letter from Lisa Dunsky, Executive Director
and Associate General Counsel, Chicago Mercantile
Exchange Inc., to Ananda Radhakrishnan, Director,
Division of Clearing and Risk (Aug. 29, 2012).
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with the interpretative guidance
provided in the Division’s letter, as
discussed further below.
In its request, CME asked for
clarification as to the meaning of the
term ‘‘non-hedge positions.’’ CME
explained that DCM requirements for
collection of higher customer initial
margin had been applied historically on
an account, rather than a position, basis.
Under existing rules or practices at
various DCMs, exchange members,
market makers, market professionals,
and certain other categories of
customers had been subject to the
clearing initial margin requirement; i.e.,
such exchange member accounts were
designated as ‘‘hedge’’ or ‘‘member,’’
and by virtue of this designation,
received the lower clearing initial
margin rate, even though there may
have been speculative positions in the
accounts.
CME also inquired as to the
applicability of § 39.13(g)(8)(ii) to nonclearing FCM customer omnibus
accounts at clearing FCMs. CME stated
that a non-clearing FCM’s customer
omnibus account may be comprised of
both hedge accounts and speculative
accounts, and the clearing FCM
typically did not know the identity of
the underlying customers in a nonclearing FCM’s omnibus account. The
non-clearing FCM sets customer initial
margin requirements based on whether
a customer account is designated as
‘‘hedge’’ or ‘‘speculative.’’ Thus, a
speculative account included within an
omnibus account already would have
been assessed the higher customer
initial margin requirement by such
customer’s non-clearing FCM. If the
clearing FCM were required to apply the
higher customer initial margin rate to
the entire customer omnibus account,
this would require the non-clearing
FCM to either (1) post more collateral
with the clearing FCM than the amount
actually collected from its hedge
customers in the omnibus account, or
(2) collect the higher customer initial
margin requirement from its hedge
customers so that it could post this
collateral with the clearing FCM.
In its response to CME’s request, the
Division stated that it interprets
§ 39.13(g)(8)(ii) ‘‘in a manner that
preserves the historical customer
margining practices applicable to FCMs
. . . [noting that] FCMs are expected to
continue the practice of collecting
customer initial margin at a level higher
than the minimum required, if such
action is warranted based on the unique
risk profile of an individual customer.’’
The Commission agrees with such
interpretation and accordingly, is
proposing to revise § 39.13(g)(8)(ii) to
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permit DCOs to continue the practice of
establishing customer initial margin
requirements based on the type of
customer account and by applying
prudential standards that result in FCMs
collecting customer initial margin at
levels commensurate with the risk
presented by each customer account.
The Commission therefore proposes
to amend § 39.13(g)(8)(ii) by deleting the
reference to ‘‘non-hedge’’ positions,
changing the reference to ‘‘a level that
is greater than 100 percent’’ to ‘‘a level
that is not less than 100 percent,’’
clarifying that the customer initial
margin level is measured against
‘‘clearing’’ initial margin requirements,
and explicitly stating that customer
initial margin levels must be
‘‘commensurate with the risk presented
by each customer account.’’
The Commission believes that
establishing a bright-line test to
determine the appropriate percentage by
which customer initial margin
requirements must exceed clearing
initial margin requirements with respect
to any particular types of customer
accounts is inappropriate because the
circumstances for each DCO and the
nature of its clearing members and their
customers vary. In adopting
§ 39.13(g)(8)(ii), the Commission noted
that the percentage ‘‘should be based on
the nature and volatility patterns of the
particular product or swap portfolio,
and the DCO’s related evaluation of the
potential risks posed by customers in
general to their clearing members and,
in turn, the potential risks posed by
such clearing members in general to the
DCO, rather than the creditworthiness of
particular customers.’’ 50 The
Commission requests comment as to
whether it should add standards or
further direction in § 39.13(g)(8)(ii), or
provide guidance to further clarify what
would be considered ‘‘commensurate
with the risk presented,’’ similar to the
Commission’s statement in the adopting
release noted above.
The Commission is proposing to
amend the language in § 39.13(g)(8)(ii)
that gives the DCO reasonable discretion
in determining the percentage by which
customer initial margin requirements
must exceed the DCO’s clearing initial
margin requirements with respect to
particular products or portfolios, by
replacing ‘‘the percentage by which’’
with ‘‘whether and by how much.’’
However, the proposed amendments to
§ 39.13(g)(8)(ii) would give the
Commission the ability to require
different customer initial margin levels
if the Commission deems the levels
50 Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR at 69378.
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insufficient to protect the financial
integrity of the DCO or its clearing
members. Since the adoption of
§ 39.13(g)(8)(ii), DCOs have typically
added a 10 percent increase to the
clearing initial margin requirement to
set the higher customer initial margin
requirement. The Commission has
generally found this to be adequate in
ordinary market conditions.
g. Haircuts—§ 39.13(g)(12)
Regulation 39.13(g)(12) requires a
DCO to apply appropriate reductions in
value to reflect credit, market, and
liquidity risks (haircuts), to the assets
that it accepts in satisfaction of initial
margin obligations. This provision also
requires a DCO to evaluate the
appropriateness of the haircuts ‘‘on at
least a quarterly basis.’’ Regulation
39.11(d)(1) requires that haircuts be
evaluated on a monthly basis for assets
that are used to meet the DCO’s
financial resources obligations set forth
in § 39.11(a). The Commission is
proposing to amend § 39.13(g)(12) to
align it with § 39.11(d)(1) by requiring
that DCOs evaluate the appropriateness
of the haircuts that they apply to assets
accepted in satisfaction of initial margin
obligations on a monthly basis. Given
that initial margin is held for risk
management purposes, and the value of
these assets change frequently, the
Commission believes it would be more
appropriate to assess haircuts more
frequently.
4. Other Risk Control Mechanisms—
§ 39.13(h)
a. Risk Limits—§ 39.13(h)(1)
Regulation 39.13(h)(1)(i) requires a
DCO to impose risk limits on each
clearing member, by house origin and
by each customer origin, in order to
prevent a clearing member from
carrying positions for which the risk
exposure exceeds a specified threshold
relative to the clearing member’s and/or
the DCO’s financial resources. The
Commission is proposing to clarify that
such risk limits should also be imposed
to address positions that may be
difficult to liquidate. This might be the
case, for example, in instances where a
position in a particular contract or swap
is concentrated with a particular
member, such that there is reason to
doubt whether, in the event that this
member defaults, other members would
be willing and able to accept,
collectively, the entirety of that position
or swap. As noted above, in section
IV.D.3.a, recent events highlight the
importance of imposing risk limits to
address positions that may be difficult
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to liquidate, particularly concentrated
positions.
b. Clearing Members’ Risk Management
Policies and Procedures—§ 39.13(h)(5)
Regulation 39.13(h)(5)(ii) requires a
DCO to, on a periodic basis, review the
risk management policies, procedures,
and practices of each of its clearing
members, which address the risks that
such clearing members may pose to the
DCO, and to document such reviews.
The Commission is proposing to clarify
that DCOs should, having conducted
such reviews, ‘‘take appropriate actions
to address concerns identified in such
reviews,’’ and that the documentation of
the reviews should include ‘‘the basis
for determining what action was
appropriate to take.’’ The Commission
notes that, where a DCO is required to
conduct any type of review under
Commission regulations, similar
remediation and documentation is
expected. Absent such follow-up, the
reviews would lack purpose.
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5. Cross-Margining Arrangements—
§ 39.13(i)
A cross-margining arrangement allows
a DCO to provide offsets or reductions
in required margin between products
that it and another DCO (or other
clearing organization) clear if the risk of
one product is significantly and reliably
correlated with the risk of the other
product. The Commission approved the
first cross-margining arrangement in
1988, and it has approved many such
arrangements since.51 Proposed
51 The Commission has issued a number of crossmargining program orders, including, but not
limited to: A June 1, 1988 order approving a
proprietary cross-margining system between the
Intermarket Clearing Corporation (ICC) and Options
Clearing Corporation (OCC), as expanded by a
November 26, 1991 order approving the addition of
cross-margining of positions of market professionals
in non-proprietary accounts of participating
clearing members to the ICC/OCC cross-margining
program, 56 FR 61406 (Comm. F. T. Comm’n Dec.
3, 1991), and as further amended by a January 22,
1996 order to incorporate the provisions of
appendix B, Framework 1 to the Commission’s part
190 Regulations; a September 26, 1989 order
approving a proprietary cross-margining system
between OCC and CME, as expanded by a
November 26, 1991 order approving the addition of
cross-margining of positions of market professionals
in non-proprietary accounts of participating
clearing members to the OCC/CME cross-margining
program, 56 FR 61404 (Comm. F. T. Comm’n Dec.
3, 1991); a June 2, 1993 order approving the
proposals of CME and ICC to implement a tri-lateral
cross-margining program with OCC, as further
amended by a January 22, 1996 amended order to
reflect the approval of proposed changes to the
CME/ICC/OCC cross-margining amendments for
proprietary and market professional accounts to
incorporate the provisions of appendix B,
Framework 1 to the Commission’s part 190
Regulations; a November 5, 2004 order approving
the establishment of an internal cross-margining
program that permits cross-margining of positions
of market professionals in internal non-proprietary
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§ 39.13(i) would codify the
Commission’s existing practices for
evaluating cross-margining
arrangements.52
In evaluating cross-margining
arrangements, the Commission reviews:
(1) The methodology to be used to
calculate margin requirements for the
positions subject to the cross-margining
arrangement; (2) the correlation between
the positions, including the stability of
the relationship among the eligible
products and the potential impact a
change in the correlation could have on
setting margin requirements; (3) the
impact on the settlement process; and
(4) the application of default
procedures, including any loss-sharing
arrangements, pursuant to the proposed
arrangement. If only one of the clearing
organizations participating in the
arrangement is a registered DCO, the
Commission looks at additional factors,
including the other clearing
organization’s status with and oversight
by other regulator(s). Also, if one of the
clearing organizations is organized
outside of the United States, the
Commission evaluates the bankruptcy
treatment in that clearing organization’s
jurisdiction. Finally, the Commission
considers the impact of the crossmargining arrangement, if any, on the
DCO’s ability to comply with the DCO
Core Principles, particularly those
concerning financial resources and risk
management. The Commission requests
comment as to whether there are other
factors the Commission should consider
and, therefore, other information that it
should request. The Commission is
proposing to require a DCO to provide
the relevant information needed to
facilitate its review as part of a rule
filing submitted for Commission
accounts of OCC clearing members; and a February
29, 2008 order approving the establishment of a
non-proprietary cross-margining agreement between
the OCC and ICE Clear US, Inc. The Commission
has also allowed cross-margining programs into
effect without Commission approval including, but
not limited to, a proprietary cross-margining
program between CME and the London Clearing
House (allowed into effect without approval on
March 23, 2000).
52 In February 2015, CPMI–IOSCO issued a Level
2 assessment report on implementation of the
PFMIs by CCPs and trade repositories in the U.S.
(Implementation Report). See CPMI–IOSCO,
Implementation monitoring of PFMIs: Level 2
assessment report for central counterparties and
trade repositories—United States (Feb. 2015),
available at https://www.bis.org/cpmi/publ/d126.pdf.
The Implementation Report noted that Commission
regulations do not explicitly address crossmargining, and in particular, the risk management
requirements necessary where two or more CCPs
participate in cross-margining arrangements. The
Commission notes that existing DCO Core
Principles and regulations regarding risk
management, treatment of customer funds, default
and settlement procedures, taken as a whole,
address cross-margining arrangements.
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approval pursuant to § 40.5. The
Commission requests comment as to
whether this would be the appropriate
process or whether a more or less
detailed review process is appropriate
given the factors and risks involved.
E. Treatment of Funds—§ 39.15
Regulation 39.15 implements Core
Principle F, which requires a DCO to
establish standards and procedures
designed to protect its clearing
members’ funds, hold such funds in a
manner that would minimize the risk of
loss or delay in the DCO’s access, and
invest such funds in instruments with
minimal credit, market, and liquidity
risks. The Commission is proposing to
amend certain aspects of § 39.15.
1. Segregation of Customer Funds—
§ 39.15(b)(1)
Regulation 39.15(b)(1) requires a DCO
to comply with the applicable
segregation requirements of section 4d
of the CEA and Commission regulations
thereunder, or any other applicable
Commission regulation or order
requiring that customer ‘‘funds and
assets’’ be segregated, set aside, or held
in a separate account. Section 4d of the
CEA refers to customer ‘‘money,
securities and property.’’ Therefore, the
Commission is proposing to amend
§ 39.15(b) to clarify that ‘‘funds and
assets’’ are equivalent to ‘‘money,
securities, and property’’ in order to
better align the language of the
regulation with the language in the
statute.
2. Commingling in Cleared Swaps
Customer Account—§ 39.15(b)(2)(i)
Regulation 39.15(b)(2)(i) requires a
DCO to file rules for Commission
approval pursuant to § 40.5 in order for
the DCO and its clearing members to
commingle customer positions in
futures, options, and swaps, and any
money, securities, or property received
to margin, guarantee or secure such
positions, in an account subject to the
requirements of section 4d(f) of the CEA
(i.e., the cleared swaps customer
account). The Commission is proposing
to revise § 39.15(b)(2)(i) to clarify that a
DCO that wants to commingle foreign
futures and foreign options with swaps
must meet the same requirements.
3. Commingling in Futures Customer
Account—§ 39.15(b)(2)(ii)
Regulation 39.15(b)(2)(ii) requires a
DCO to file a petition for an order
pursuant to section 4d(a) of the CEA in
order for the DCO and its clearing
members to commingle customer
positions in futures, options, and swaps,
and any money, securities, or property
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received to margin, guarantee or secure
such positions, in an account subject to
the requirements of section 4d(a) of the
CEA. The Commission is proposing to
revise § 39.15(b)(2)(ii) to clarify that a
DCO that wants to commingle foreign
futures and foreign options with futures
and options must meet the same
requirements as a DCO that wants to
commingle swaps with futures and
options.
Further, when § 39.15(b)(2)(ii) was
first promulgated, the Commission, in
reference to its decision to require an
order rather than a rule approval to
commingle cleared swaps with futures
in a futures account, stated ‘‘at this time,
it is appropriate to provide these
additional procedural protections before
exposing futures customers to the risks
of swaps that may be commingled in a
futures account.’’ 53 The Commission,
however, acknowledged that ‘‘as the
Commission and the industry gain more
experience with cleared swaps, the
Commission may revisit this issue in the
future.’’ 54 The Commission now
believes that a request for a rule
approval that complies with § 40.5 will
provide the Commission with sufficient
means to determine whether customer
funds held in a futures account will be
adequately protected if cleared swaps,
foreign futures, or foreign options are
also held in the account.
Therefore, the Commission is
proposing to revise § 39.15(b)(2)(ii) to
require a DCO to file rules for
Commission approval pursuant to § 40.5
in order for the DCO and its clearing
members to commingle swaps, foreign
futures, or foreign options with futures
and options in an account subject to the
requirements of section 4d(a) of the
CEA.
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4. Commission Action—§ 39.15(b)(2)(iii)
Regulation 39.15(b)(2)(iii) provides
that the Commission may ‘‘grant
approval of’’ a rule submission filed
under § 39.15(b)(2)(i) in accordance
with § 40.5. The Commission is
proposing to replace the words ‘‘grant
approval of’’ with ‘‘approve’’ in order to
be consistent with the language used in
§ 40.5(b). Further, the Commission is
proposing to amend § 39.15(b)(2)(iii) to
reflect the proposed changes to
§ 39.15(b)(2)(ii). Specifically, the
Commission is proposing to eliminate
§ 39.15(b)(2)(iii)(A) and (B) and include
the content of both paragraphs within
§ 39.15(b)(2)(iii).
53 Derivatives
Clearing Organization General
Provisions and Core Principles, 76 FR at 69392.
54 Id.
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5. Transfer of Customer Positions—
§ 39.15(d)
Regulation 39.15(d) requires a DCO to
have rules providing for the prompt
transfer of all or a portion of a
customer’s portfolio of positions and
related funds at the same time from the
carrying clearing member to another
clearing member, without requiring the
close-out and re-booking of the
positions prior to the requested transfer.
Some DCOs have noted that, although
a DCO may transfer positions from one
clearing member to another, the DCO
does not generally transfer funds. The
DCO simply adjusts the amount of
margin due from, or owed to, each
clearing member during the next
collection cycle. Moreover, the receiving
clearing member may not owe
additional funds if it has sufficient
excess margin funds on deposit at the
DCO. The DCO may only transfer funds
if it has already collected variation
margin from the transferring clearing
member and positions were transferred
at the trade price. In addition, any
excess margin held by the transferring
clearing member would be transferred to
the receiving clearing member.
Accordingly, the Commission is
proposing to amend § 39.15(d) to delete
the words ‘‘at the same time,’’ thus
requiring the ‘‘prompt,’’ but not
necessarily simultaneous, transfer of a
customer’s positions and related funds.
The Commission is further amending
the provision to require the transfer of
related funds ‘‘as necessary,’’
recognizing that the transfer of customer
positions will not always require the
transfer of funds.
6. Permitted Investments—§ 39.15(e)
Regulation 39.15(e) requires any
investment of customer funds or assets
by a DCO to comply with § 1.25, as if
all such funds and assets comprise
customer funds subject to segregation
pursuant to section 4d(a) of the CEA and
Commission regulations thereunder. At
the time § 39.15(e) was adopted, the
Commission had not yet adopted
regulations concerning cleared swaps
customer funds but intended for
§ 39.15(e) to also apply to those funds.
The Commission has since adopted the
part 22 regulations and therefore is
proposing to amend § 39.15(e) to clarify
that the requirement applies to any
investment of customer funds or assets,
including cleared swaps customer
collateral as defined in § 22.1.
F. Default Rules and Procedures—
§ 39.16
Regulation 39.16 codifies Core
Principle G, which requires a DCO to
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have rules and procedures designed to
allow for the efficient, fair, and safe
management of events during which a
clearing member becomes insolvent or
otherwise defaults on its obligations to
the DCO. Core Principle G also requires
a DCO to clearly state its default
procedures, make its default rules
publicly available, and ensure that it
may take timely action to contain losses
and liquidity pressures while
continuing to meet its obligations. The
Commission is proposing to amend
certain aspects of § 39.16.55
1. Default Management Plan—§ 39.16(b)
Regulation 39.16(b) requires a DCO to
have a default management plan and,
among other things, test the plan at least
on an annual basis. A DCO’s default
management plan involves its clearing
members, so the Commission believes
the plan cannot be tested effectively
without the clearing members’
participation. Accordingly, the
Commission is proposing to amend
§ 39.16(b) to add a requirement that the
DCO include clearing members in a test
of its default management plan on at
least an annual basis. A DCO should
ensure that a sufficient portion of its
clearing membership participates in
such testing and is therefore prepared to
support the DCO’s default management
efforts.
2. Default Procedures—§ 39.16(c)
Regulation 39.16(c) requires a DCO to
adopt procedures that would permit the
DCO to take timely action to contain
losses and liquidity pressures and to
continue meeting its obligations in the
event of a default by one if its clearing
members. The Commission is proposing
to amend § 39.16(c)(1) to require a DCO
to have a default committee that would
be convened in the event of a default
involving substantial or complex
positions to help identify market issues
with any action the DCO is considering.
The default committee would be
required to include clearing members
and could include other participants to
help the DCO efficiently manage the
house or customer positions of the
defaulting clearing member.
The Commission also is proposing to
amend § 39.16(c)(2)(ii) to require that a
DCO have default procedures that
include immediate public notice on the
DCO’s website of a declaration of
default. The Commission believes it is
important to the integrity and stability
of the financial markets that clearing
members, other CCPs, and the public
55 The proposed amendments to § 39.16 include
replacing ‘‘adopt’’ with ‘‘have’’ where a DCO is
required to adopt rules, consistent with the
proposed changes to § 39.12 previously discussed.
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become aware as soon as possible when
a default has occurred. The Commission
requests comment, however, as to
whether the timing of the
announcement would potentially
impact the market or the DCO’s ability
to manage the default.
Finally, § 39.16(c)(2)(iii)(C) requires
any allocation of a defaulting clearing
member’s positions to be proportional to
the size of the participating or accepting
clearing member’s positions in the same
product class at the DCO. The
Commission is proposing to amend this
provision to clarify that the DCO shall
not require a clearing member to bid for
a portion of, or accept an allocation of,
the defaulting clearing member’s
positions that is not proportional to the
size of the bidding or accepting clearing
member’s positions in the same product
class at the DCO. This is intended to
clarify that a clearing member that
wishes to voluntarily bid for or accept
more than its proportional share should
be allowed to do so, provided that the
clearing member has the ability to
manage the risk of the new positions.
The Commission is proposing to
further amend § 39.16(c)(2)(iii)(C) in
order to clarify that the provision
applies to both auctions and allocations
and to provide that the size of the
participating or accepting clearing
member’s positions in the same product
class at the DCO should be measured by
the clearing initial margin requirement
for those positions. The Commission
requests comment as to whether the
Commission should require DCOs to
take into consideration other indicators
of active participation in a market, such
as open interest, volume, and/or other
criteria.
G. Rule Enforcement—§ 39.17
Regulation 39.17(a) codifies Core
Principle H, which requires a DCO to
maintain adequate arrangements and
resources for the effective monitoring
and enforcement of compliance with its
rules and dispute resolution. Core
Principle H also requires a DCO to have
the authority and ability to discipline,
limit, suspend, or terminate the
activities of a member or participant if
it violates the DCO’s rules. Finally, Core
Principle H requires a DCO to report its
rule enforcement activities and
sanctions imposed on members and
participants to the Commission. The
Commission is proposing to amend
§ 39.17(a)(1) to clarify the Commission’s
expectation that DCOs currently do, and
will continue to, ensure that both the
DCO and its members comply with the
DCO’s rules.
Regulation 39.17(b) permits a DCO’s
board of directors to delegate its
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responsibility for compliance with the
requirements of § 39.17(a) to the DCO’s
risk management committee. The
Commission recognizes that some DCOs
delegate such responsibility to a
committee other than the risk
management committee. Therefore, the
Commission is proposing to amend
§ 39.17(b) to replace ‘‘risk management
committee’’ with ‘‘an appropriate
committee.’’
H. Reporting—§ 39.19
Regulation 39.19 implements Core
Principle J, which requires that each
DCO provide to the Commission all
information that the Commission
determines to be necessary to conduct
oversight of the DCO. In addition to
clarifying existing requirements, the
Commission is proposing to adopt
additional reporting requirements that
would allow the Commission to conduct
more effective oversight of DCO
compliance with the DCO Core
Principles and Commission regulations.
1. General—§ 39.19(a)
The Commission is proposing to
revise the text of § 39.19(a) to match the
text of Core Principle J. The proposed
revisions are not meant to alter the
meaning of the provision.
2. Submission of Reports—§ 39.19(b)
Regulation 39.19(b)(1) requires a DCO
to submit the information required by
the section to be submitted to the
Commission electronically and in a
format and manner specified by the
Commission, unless otherwise specified
by the Commission or its designee. The
Commission is proposing to delete
‘‘[u]nless otherwise specified by the
Commission or its designee’’ and
‘‘electronically,’’ requiring a DCO to
submit the information in a format and
manner specified by the Commission.
This would simplify the text while
retaining the flexibility the Commission
originally intended. The Commission is
proposing new § 39.19(b)(2) to require
that when making a submission
pursuant to the section, an employee of
a DCO must certify that he or she is duly
authorized to make such a submission
on behalf of the DCO. This provision
would codify existing practices with
respect to the use of the CFTC Portal for
submissions pursuant to § 39.19.
Finally, the Commission is proposing to
remove existing § 39.19(b)(3) and move
the definition of ‘‘business day’’ to
§ 39.2, as previously discussed. Existing
§ 39.19(b)(2) would be renumbered as
§ 39.19(b)(3).
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3. Daily Reporting of Information—
§ 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a
DCO to report to the Commission on a
daily basis margin, cash flow, and
position information for each clearing
member, by house origin and by each
customer origin. The Commission is
proposing to amend § 39.19(c)(1)(i) to
require a DCO to additionally report
margin, cash flow, and position
information by individual customer
account, which is information the DCOs
currently provide. The Commission is
specifying ‘‘individual customer
account,’’ as individual customers may
have multiple accounts, which should
be reported separately. The Commission
is also proposing to have DCOs provide
any legal entity identifiers and
internally-generated identifiers within
each customer origin for each clearing
member. The Commission is also
proposing to amend § 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day
positions, DCOs must report the
positions themselves (i.e., the long and
short positions) as well as risk
sensitivities and valuation data for these
positions.
Risk-sensitivities are different
measures of the impact of changes in
underlying factors on the value of the
positions. For example, an interest rate
delta describes the theoretical profit or
loss (‘‘P&L’’) that results from a one
basis point increase in a currency’s
interest rate curve. A delta ladder
describes a series of sensitivities for
different maturity points (tenors) where
each ‘‘rung’’ represents an increasing
maturity point or tenor along the zero
rate curve term structure. Each value on
the rung represents the P&L that the
portfolio would experience if the
interest rate for that tenor were to
increase by one basis point, all else
being equal. Thus, if the entire curve
were to shift up by one basis point, the
portfolio’s theoretical P&L would be
equal to the sum of all the individual
sensitivities. In the context of options,
examples of risk sensitivities would be
the different Greeks—delta measures an
option’s price sensitivity relative to
changes in the price of the underlying
asset, gamma measures the sensitivity of
delta in response to price changes in the
underlying instrument, vega measures
an option’s sensitivity to changes in the
volatility of the underlying, theta
measures the time decay of an option.
Valuation data refer to variables and
inputs that reflect current market
conditions, as well as expectations for
the future. In the case of credit default
swaps, valuation models rely on for
example, risk neutral default
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probabilities of swaps, forward credit
spreads for different maturities. For
interest rate swaps, valuation models
require discount factors.
The Commission intends to
implement a range of different
methodologies to conduct risk
surveillance of cleared derivatives
exposures, some involving full
revaluation of portfolios and others
relying on delta ladders and other risk
sensitivities. Collectively, the enhanced
information sets will enable
Commission staff to run stress tests;
identify concentration and risk in
currencies and in maturity buckets;
perform back testing; validate guaranty
funds; and validate variation margin.
4. Daily Reporting on Securities
Positions—§ 39.19(c)(1)(ii)(C)
Regulation 39.19(c)(1)(i) requires
DCOs to submit certain information to
the Commission on a daily basis, e.g.,
initial margin requirements, initial
margin on deposit, daily variation
margin, other daily cash flows such as
option premiums, and end-of day
positions. Paragraph (c)(1)(ii)(C) further
instructs DCOs to provide the required
information for all securities positions
that are held in a customer account
subject to section 4d of the CEA or are
subject to a cross-margining agreement.
Paragraph (c)(1)(ii)(C) was added to
clarify the applicability of daily
reporting requirements to securities
positions carried by FCMs that are also
registered broker-dealers.
Since the adoption of § 39.19(c)(1),
the Commission has become aware of a
potential ambiguity in the wording of
paragraph (c)(1)(ii)(C), which requires
the reporting of all securities positions
‘‘that are held in a customer account
subject to section 4d of the Act or are
subject to a cross-margining agreement.’’
The ambiguity concerns whether the
reporting requirement for securities
positions subject to a cross-margining
agreement applies to customer positions
only or to any position subject to a
cross-margining agreement, whether
house or customer.
Reporting of securities positions is
designed to capture positions that could
have an impact on the risks a DCO must
manage. Because risks associated with
securities positions subject to a crossmargining agreement would be relevant
to the DCO’s risk management function
and therefore the Commission’s risk
surveillance program, all such securities
positions, whether house or customer,
were intended to be included in daily
reporting. In order to avoid ambiguity
and more precisely articulate the scope
of paragraph (c)(1)(ii)(C), the
Commission is proposing to insert
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subordinate paragraph numbering
between the clauses in paragraph
(c)(1)(ii)(C) which relate to securities
positions held in a customer account or
subject to a cross-margining agreement.
5. Quarterly Reporting—§ 39.19(c)(2)
Regulation 39.19(c)(2) requires a DCO
to provide the financial resources report
required by § 39.11(f). The Commission
adopted § 39.19(c)(2) so that each DCO
reporting requirement would be
included in § 39.19. The Commission is
proposing to revise the text of
§ 39.19(c)(2) to be more consistent with
the text of § 39.11(f); i.e., a DCO would
be required to provide to the
Commission each fiscal quarter, or at
any time upon Commission request, a
report of the DCO’s financial resources
as required by § 39.11(f)(1).
6. Audited Year-End Financial
Statements—§ 39.19(c)(3)(ii)
Regulation 39.19(c)(3)(ii) requires a
DCO to file with the Commission its
audited year-end financial statements
or, if there are no financial statements
available for the DCO, the consolidated
audited year-end financial statements of
the DCO’s parent company. As with the
quarterly filing requirements of
§ 39.11(f)(1)(ii), the purpose of requiring
a DCO to submit year-end financial
statements is to enable the Commission
to assess the financial strength of the
DCO. However, if a DCO is part of a
large and complex corporate structure
and files its parent company’s financial
statements, it can be difficult for the
Commission to assess the financial
strength of the DCO itself. Therefore, the
Commission is proposing to amend
§ 39.19(c)(3)(ii) to require the audited
year-end financial statements of the
DCO.
7. Time of Report—§ 39.19(c)(3)(iv)
Regulation 39.19(c)(3)(iv) requires a
DCO to submit concurrently to the
Commission all reports required by
paragraph (c)(3) not more than 90 days
after the end of the DCO’s fiscal year.
The Commission may provide an
extension of time only if it determines
that a DCO’s failure to submit the report
in a timely manner ‘‘could not be
avoided without unreasonable effort or
expense.’’ 56 The Commission is
proposing to eliminate this requirement
to provide it with the flexibility to grant
extensions under additional
circumstances when appropriate.
Additionally, the Commission is
proposing to remove the requirement
56 The Commission delegated this authority to the
Director of the Division of Clearing and Risk under
§ 140.94(c)(9).
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22241
that reports be submitted concurrently
in order to provide DCOs with the
flexibility to submit reports required
under § 39.19(c)(3) as they are
completed. The Commission recognizes
that one report may be completed
sooner than the other and believes it
would benefit the Commission’s
oversight of the DCO if the Commission
could begin reviewing the report as soon
as it is ready.
8. Decrease in Financial Resources—
§ 39.19(c)(4)(i)
The Commission is proposing a
technical amendment to § 39.19(c)(4)(i),
which concerns reporting of a decrease
in a DCO’s financial resources. The
amendment would add a reference to
the financial resources requirements of
§ 39.33, which applies to SIDCOs and
subpart C DCOs. The Commission also
is proposing to renumber the
subordinate paragraphs for the sake of
clarity.
9. Decrease in Liquidity Resources—
§ 39.19(c)(4)(ii)
The Commission is proposing to
adopt new § 39.19(c)(4)(ii),57 which
would require the same reporting for a
decrease in liquidity resources as that
required by § 39.19(c)(4)(i) for a
decrease in overall financial resources.
The reporting required in
§ 39.11(f)(1)(ii) provides the
Commission with notice of any change
in a DCO’s liquidity resources over the
course of a fiscal quarter. This new
provision would provide the
Commission with notice if a DCO has a
significant decrease in liquidity
resources over a short period of time,
which could indicate there is a greater
issue of which the Commission should
be aware.
10. Request to Clearing Member To
Reduce Positions—§ 39.19(c)(4)(vi)
The Commission is proposing to
amend current § 39.19(c)(4)(v), proposed
to be renumbered as § 39.19(c)(4)(vi),
which requires a DCO to notify the
Commission immediately of a request
by the DCO to one of its clearing
members to reduce the clearing
member’s positions, by deleting the
words ‘‘because the [DCO] has
determined that the clearing member
has exceeded its exposure limit, has
failed to meet an initial or variation
margin call, or has failed to fulfill any
other financial obligation to the [DCO].’’
The Commission believes it should be
57 The Commission is proposing to renumber
existing § 39.19(c)(4)(ii) and all subsequent
paragraphs of § 39.19(c)(4).
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notified of such a request regardless of
the reason for the request.
11. Change in Key Personnel—
§ 39.19(c)(4)(x)
The Commission is proposing to
amend current § 39.19(c)(4)(ix),
proposed to be renumbered as
§ 39.19(c)(4)(x), which requires a DCO to
report to the Commission no later than
two business days following the
departure or addition of persons who
are key personnel as defined in § 39.2.
The Commission proposes to clarify that
the notification requirement applies to
both temporary and permanent
replacements, and that the report must
include contact information.
12. Change in Legal Name—
§ 39.19(c)(4)(xi)
The Commission is proposing to
adopt new § 39.19(c)(4)(xi), which
would require a DCO to report a change
to the legal name under which it
operates. This requirement would help
to ensure that DCO-specific information
reflected on the Commission’s website,
as well as in the Commission’s internal
records, is accurate and up-to-date. The
Commission notes, however, that the
DCO’s registration order (and other
existing orders issued by the
Commission) would not need to be
changed to reflect the legal name
change.
13. Change in Liquidity Funding
Arrangement—§ 39.19(c)(4)(xiii)
The Commission is proposing to
adopt new § 39.19(c)(4)(xiii), which
would require a DCO to report a change
in any liquidity funding arrangement it
has in place. This requirement would be
similar to that of § 39.19(c)(4)(x)
(proposed to be renumbered as
§ 39.19(c)(4)(xii)), which requires a DCO
to report any change in a credit facility
funding arrangement it has in place.
This will assist the Commission in
overseeing the liquidity risk
management of DCOs.
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14. Change in Settlement Bank
Arrangements—§ 39.19(c)(4)(xiv)
The Commission is proposing to
adopt new § 39.19(c)(4)(xiv), which
would require a DCO to report a change
in its arrangements with any settlement
bank used by the DCO or approved for
use by the DCO’s clearing members.
Receiving such reporting will aid the
Commission in monitoring a DCO’s
compliance with § 39.14(c), which sets
forth specific requirements for
settlement arrangements.
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15. Settlement Bank Issues—
§ 39.19(c)(4)(xv)
The Commission is proposing to
adopt new § 39.19(c)(4)(xv), which
would require a DCO to report to the
Commission no later than one business
day after learning of any material issues
or concerns regarding the performance,
stability, liquidity, or financial
resources of any settlement bank used
by the DCO or approved for use by the
DCO’s clearing members.
16. Change in Depositories for Customer
Funds—§ 39.19(c)(4)(xvi)
The Commission is proposing to
adopt new § 39.19(c)(4)(xvi), which
would require a DCO to report any
change in its arrangements with any
depositories at which the DCO holds
customer funds. Receiving such
reporting will aid the Commission in
monitoring a DCO’s compliance with
section 4d of the CEA and related
Commission regulations regarding the
treatment of customer funds, including
§ 39.15(b).
17. Change in Fiscal Year—
§ 39.19(c)(4)(xx)
The Commission is proposing to
adopt new § 39.19(c)(4)(xx), which
would require a DCO to immediately
notify the Commission of any change to
the start and end dates for its fiscal year.
Because several other required reports
are tied to a DCO’s fiscal year (e.g.,
quarterly financial reports, annual
report of the chief compliance officer),
a change in the DCO’s fiscal year would
change the reporting periods and
deadlines for those reports, and the
Commission would need to know when
those reports are to be submitted by the
DCO.
18. Change in Independent Accounting
Firm—§ 39.19(c)(4)(xxi)
The Commission is proposing to
adopt new § 39.19(c)(4)(xxi), which
would require a DCO to report to the
Commission no later than one business
day after any change in the DCO’s
independent public accounting firm.
The report would include the date of
such change, the name and contact
information of the new firm, and the
reason for the change.
19. Major Decision of the Board of
Directors—§ 39.19(c)(4)(xxii)
The Commission is proposing to
adopt new § 39.19(c)(4)(xxii) to codify
in § 39.19 the requirement (currently in
§ 39.32(a)(3)(i) and proposed in
§ 39.24(a)(3)(i), as discussed further
below) that a DCO report to the
Commission any major decision of the
DCO’s board of directors.
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20. Margin Model Issues—
§ 39.19(c)(4)(xxiv)
The Commission is proposing to
adopt new § 39.19(c)(4)(xxiv), which
would require a DCO to report to the
Commission no later than one business
day after any issue occurs with a DCO’s
margin model, including margin models
for cross-margined portfolios, that
affects the DCO’s ability to calculate or
collect initial margin or variation
margin. The Commission is proposing
this change because some DCOs have
had unanticipated issues arise with the
functioning of their margin models as a
result of, among other things, the
introduction of new products or
significant increases in volatility.
21. Recovery and Wind-Down Plans—
§ 39.19(c)(4)(xxv)
The Commission is proposing to
adopt new § 39.19(c)(4)(xxv), which
would require a DCO that is required to
maintain recovery and wind-down
plans pursuant to § 39.39(b) to submit
its plans to the Commission no later
than the date on which it is required to
have the plans. The Commission is also
proposing to permit a DCO that is not
required to maintain recovery and winddown plans pursuant to § 39.39(b), but
which nonetheless maintains such
plans, to submit the plans to the
Commission. If a DCO subsequently
revises its plans, the DCO would be
required to submit the revised plans to
the Commission along with a
description of the changes and the
reason for those changes. The
Commission is proposing this
requirement because § 39.39(b) requires
certain DCOs to maintain recovery and
wind-down plans, but there is currently
no explicit requirement that the DCOs
submit the plans to the Commission.
22. New Product Accepted for
Clearing—§ 39.19(c)(4)(xxvi)
The Commission is proposing to
adopt new § 39.19(c)(4)(xxvi), which
would require a DCO to provide notice
to the Commission no later than 30
calendar days prior to accepting a new
product for clearing. The Commission is
proposing this change because § 40.2
requires a DCM or SEF to make a
submission to the Commission prior to
listing a product for trading that has not
been approved under § 40.3, but there is
currently no comparable requirement
applicable to DCOs.
The proposed notice would include:
(1) A brief description of the new
product; (2) the date on which the DCO
intends to begin accepting the new
product for clearing; (3) a statement as
to whether the new product will require
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the DCO to submit any rule changes
pursuant to §§ 40.5 or 40.6; (4) a
statement as to whether the DCO has
informed, or intends to inform, its
clearing members and/or the general
public of the new product and, if
written notice was given, a web address
for or copy of such notice; and (5) an
explanation of any substantive opposing
views received from such outreach and
how the DCO addressed such views or
objections. The Commission believes
receiving the notice 30 days before the
DCO will begin accepting the product
for clearing will allow Commission staff
enough time to ask further questions of
the DCO as necessary.
The Commission has not defined
‘‘product’’ for purposes of § 40.2 or
§ 40.3. The Commission requests
comment on whether defining this term
would be helpful in clarifying what
products must be reported to the
Commission under proposed new
§ 39.19(c)(4)(xxvi). If so, the
Commission further requests comment
regarding how the term should be
defined.
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23. Requested Reporting—§ 39.19(c)(5)
Regulation 39.19(c)(5)(i) through (iii)
requires a DCO to provide to the
Commission, upon request by the
Commission, specific types of
information. Paragraphs (c)(5)(i) through
(iii) states that the information must be
provided to the Commission ‘‘in the
format and manner specified, and
within the time provided, by the
Commission in the request.’’ The
Commission is proposing to amend
§ 39.19(c)(5)(i) through (iii) by deleting
this language from each of the
subparagraphs and adding introductory
language to the paragraph that would
require a DCO to provide the
information specified in the paragraphs
upon request by the Commission ‘‘and
within the time specified in the
request.’’ Regulation 39.19(b) already
requires a DCO to provide the
information in the format and manner
specified by the Commission, so it is
unnecessary to repeat that requirement
in § 39.19(c)(5).
The Commission is proposing to
remove current § 39.19(c)(5)(iii), which
requires a DCO to report to the
Commission upon request end of day
gross positions by each beneficial
owner. This provision is no longer
necessary given the proposed
amendment to § 39.19(c)(1)(i), which
requires a DCO to report margin, cash
flow, and position information by
individual customer account.
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I. Public Information—§ 39.21
Regulation 39.21 implements Core
Principle L, which generally requires
that a DCO provide to market
participants sufficient information to
enable the market participants to
identify and evaluate accurately the
risks and costs associated with using the
services of the DCO. The Commission is
proposing some minor changes to clarify
the requirements of § 39.21.
1. Public Disclosure and Publication of
Information—§ 39.21(c) and (d)
Regulation 39.21(c) requires a DCO to
disclose publicly and to the
Commission information concerning: (1)
The terms and conditions of each
contract, agreement, and transaction
cleared and settled by the DCO; (2) each
clearing and other fee that the DCO
charges its clearing members; (3) the
margin-setting methodology; (4) the size
and composition of the financial
resource package available in the event
of a clearing member default; (5) daily
settlement prices, volume, and open
interest for each contract, agreement, or
transaction cleared or settled by the
DCO; (6) the DCO’s rules and
procedures for defaults in accordance
with § 39.16; and (7) any other matter
that is relevant to participation in the
clearing and settlement activities of the
DCO. Regulation 39.21(d) requires the
DCO to post all of this information, as
well as the DCO’s rulebook and a list of
its current clearing members, on the
DCO’s website, unless otherwise
permitted by the Commission.
The Commission is proposing to
remove § 39.21(d) and incorporate its
requirements into § 39.21(c). The
Commission believes that this will help
clarify for DCOs what information must
be made publicly available on their
websites. The Commission has noted
that some DCOs have made available
certain items of information listed in
current § 39.21(c) only by posting their
rulebooks on their websites. The
Commission wishes to clarify that a
DCO must make each of the items of
information listed in proposed
§ 39.21(c) available separately on the
DCO’s website and not just in the DCO’s
rulebook. This will assist members of
the public in locating the relevant
information and may facilitate greater
uniformity across DCO websites.
22243
concerning how often this information
must be updated. Regulation
39.11(f)(1)(i)(A) requires a DCO to report
this information to the Commission
each fiscal quarter or at any time upon
Commission request. The Commission
believes it is reasonable to expect a DCO
to update this information publicly with
the same frequency. Therefore, the
Commission is proposing to amend
§ 39.21(c)(4) by adding the words
‘‘updated as of the end of the most
recent fiscal quarter or upon
Commission request and posted
concurrently with submission of the
report to the Commission under
§ 39.11(f)(1)(i)(A).’’
3. Daily Settlement Prices, Volume, and
Open Interest—§ 39.21(c)(5)
Regulation 39.21(c)(5) requires a DCO
to disclose publicly daily settlement
prices, volume, and open interest for
each contract, agreement, or transaction
cleared or settled by the DCO. Pursuant
to current § 39.21(d), this information
must be made available to the public on
the DCO’s website no later than the
business day following the day to which
the information pertains.
The Commission has received
questions from DCOs about the
appropriate scope and time period for
disclosure of daily settlement prices.
With respect to scope, § 39.21(c)(5)
clearly refers to daily settlement prices,
volume, and open interest ‘‘for each
contract, agreement, or transaction
cleared or settled’’ by the DCO. The
Commission therefore expects
comprehensive disclosure of daily
settlement prices, volume, and open
interest for all contracts cleared or
settled by the DCO, acting in its capacity
as a DCO.58 However, the Commission
is aware that certain DCOs may not be
posting all of the required information
on their websites. The Commission
notes that current § 39.21(d) requires
posting of this information ‘‘unless
otherwise permitted by the
Commission.’’ Accordingly, any DCO
that does not post all of the required
information must seek relief from the
Commission. In addition, although the
plain language of § 39.21(c)(5) indicates
that ‘‘daily’’ is intended to apply not
only to settlement prices, but also to
volume and open interest, the
Commission hereby confirms that DCOs
are expected to publicly disclose
2. Financial Resources—§ 39.21(c)(4)
Regulation 39.21(c)(4) requires a DCO
to disclose publicly the size and
composition of its financial resource
package available in the event of a
clearing member default. The
Commission has received questions
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58 Regulation 39.21(c)(5) does not require a DCO
to post information concerning contracts,
agreements, or transactions it clears outside of its
capacity as a DCO. For example, a DCO that is also
registered with the SEC as a securities clearing
agency would not have to post information
concerning security-based swaps in order to comply
with this provision.
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volume and open interest, as well as
settlement prices, on a daily basis in
order to comply with § 39.21(c)(5).
Regulation 39.21(c)(5) does not
specify a period of time the information
must remain on the website. However,
the Commission notes that certain DCOs
make several days’ worth of information
available on their websites, and the
Commission encourages others to do the
same.
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4. Swaps Required To Be Cleared—
§ 39.21(c)(8)
Regulation 50.3(a) requires that a DCO
make publicly available on its website a
list of all swaps that it will accept for
clearing and identify which swaps on
the list are required to be cleared under
section 2(h)(1) of the CEA and part 50
of the Commission’s regulations. The
Commission is proposing to adopt
§ 39.21(c)(8) to add a cross-reference to
§ 50.3(a).
J. Governance Fitness Standards,
Conflicts of Interest, and Composition of
Governing Boards—§§ 39.24, 39.25, and
39.26
The Dodd-Frank Act added three new
core principles to the CEA relating to
the governance of a DCO and the
mitigation of potential conflicts of
interest within a DCO. Core Principle O
requires a DCO to establish governance
arrangements that are transparent to
fulfill public interest requirements and
to permit the consideration of the views
of owners and participants. Core
Principle O also requires a DCO to
establish and enforce appropriate fitness
standards for directors, members of any
disciplinary committee, members of the
DCO, any other individual or entity
with direct access to the settlement or
clearing activities of the DCO, and any
other party affiliated with any of the
foregoing individuals or entities.
Core Principle P requires a DCO to
establish and enforce rules to minimize
conflicts of interest in the decisionmaking process of the DCO and
establish a process for resolving such
conflicts of interest. Core Principle Q
requires a DCO to ensure that the
composition of its governing board or
committee includes market participants.
After the Dodd-Frank Act was
enacted, the Commission proposed
regulations that would have
implemented Core Principles O, P, and
Q.59 Those regulations have not been
59 See Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and
Swap Execution Facilities Regarding the Mitigation
of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010);
Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and
Swap Execution Facilities; Additional
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finalized, but the Commission did adopt
other regulations that address some of
the same issues that the proposed
regulations would have addressed. For
example, § 39.12(a)(1) requires a DCO to
have participant eligibility criteria that
permit fair and open access to the DCO;
this addresses the concern that a DCO’s
existing clearing members might try to
block potential members’ access to the
DCO for reasons that are not riskbased.60
As previously noted, the Commission
also adopted subpart C of part 39 of the
Commission’s regulations.61 Included in
subpart C is § 39.32, which sets forth the
requirements for governance
arrangements for SIDCOs and subpart C
DCOs. In promulgating § 39.32, the
Commission noted that its requirements
are consistent with Core Principles O, P,
and Q.62
The Commission is proposing to
remove § 39.32 and adopt new §§ 39.24,
39.25, and 39.26, which would
incorporate all of the requirements of
§ 39.32 and move them to subpart B,
making them applicable to all DCOs, not
just SIDCOs and subpart C DCOs. These
governance requirements are designed
to enhance risk management and
controls by promoting transparency of
governance arrangements and making
sure that the interests of a DCO’s
clearing members and, where relevant,
their customers are taken into account.
The Commission believes these
standards are appropriate for all DCOs,
as most DCOs already meet such
standards in order to be considered a
QCCP, and incorporate best practices
within the clearing industry. The
Commission notes, however, that while
the language that is proposed to be
adopted in these sections is essentially
the same as that which is included in
§ 39.32, the provisions have been
rearranged to correspond with the
relevant core principle—§ 39.24
implements Core Principle O; § 39.25
implements Core Principle P; and
§ 39.26 implements Core Principle Q.
As noted above, Core Principle Q
requires a DCO to ensure that the
composition of its governing board or
committee includes market participants.
The Commission has become aware of
issues in interpreting this requirement.
Requirements Regarding the Mitigation of Conflicts
of Interest, 76 FR 722 (Jan. 6, 2011). The
Commission is withdrawing these proposals as they
relate to DCOs.
60 Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and
Swap Execution Facilities Regarding the Mitigation
of Conflicts of Interest, 75 FR at 63735–36.
61 See Derivatives Clearing Organizations and
International Standards, 78 FR 72476 (Dec. 2, 2013).
62 See id. at 72485–86.
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In order to avoid ambiguity and provide
greater clarity, the Commission is
proposing to clarify certain aspects of
this requirement. First, Commission
staff has received questions as to
whether the term ‘‘governing’’ should be
read to apply only to the term ‘‘board,’’
or if it should be read to apply to the
term ‘‘committee’’ as well. Consistent
with the title of Core Principle Q,
‘‘Composition of Governing Boards,’’ the
Commission interprets this clause to
refer to the governing body, whether a
‘‘board’’ or a ‘‘committee,’’ and does not
interpret this clause to refer to the
‘‘governing board’’ or a ‘‘committee,’’
which could be any type of committee.
Therefore, the Commission is proposing
to require market participation on the
DCO’s governing board or board-level
committee, i.e., the group with the
ultimate decision-making authority.
Second, the Commission is proposing
to define ‘‘market participant’’ in part 39
to mean any clearing member of the
DCO or customer of such clearing
member, or an employee, officer, or
director of such an entity. A DCO’s
clearing members and their customers
have a unique perspective that
complements that of the other decision
makers on the governing board.
Customers clearing trades through an
FCM in a particular market are exposed
to the risks of that market, just as
clearing members are, and therefore
have similar interests in the decisions
that govern the operations of the DCO.
In general, clearing members and their
customers understand risk, have market
experience and perspective, and have
knowledge of clearing and the markets
for which the DCO clears. The
Commission notes that an employee,
officer, or director of a market
participant serving on a DCO’s
governing board or committee is not
necessarily required to have voting
power, as such participation may
impose duties that are in conflict with
the employee, officer, or director’s
duties to the market participant.
However, a non-voting market
participant must otherwise be enabled
by the DCO to participate fully in board
meetings in terms of receiving
information, providing input, and
representing market participant views.
K. Legal Risk—§ 39.27
Regulation 39.27(c) requires a DCO
that provides clearing services outside
the United States to identify and
address conflict of law issues, specify a
choice of law, be able to demonstrate
the enforceability of its choice of law in
relevant jurisdictions, and be able to
demonstrate that its rules, procedures,
and contracts are enforceable in all
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relevant jurisdictions. In addition, Form
DCO requires each applicant for DCO
registration that provides or will
provide clearing services outside the
United States to provide a memorandum
to the Commission that would, among
other things, analyze the insolvency
issues in the jurisdiction where the
applicant is based.
The Commission is proposing to
amend § 39.27(c) by adding paragraph
(c)(3). Proposed § 39.27(c)(3) would
require a DCO that provides clearing
services outside the United States to
ensure on an ongoing basis that the
memorandum required in Exhibit R of
Form DCO is accurate and up to date
and to submit an updated memorandum
to the Commission promptly following
all material changes to the analysis or
content contained in the memorandum.
L. Fully-Collateralized Positions
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The Commission has oversight of a
few registered DCOs that clear fullycollateralized positions. Fullycollateralized positions are designed to
have on deposit a sufficient amount of
funds, at all times, to cover the
maximum potential loss that could be
incurred in connection with a position.
In the case of binary options, for
example, the maximum risk is limited to
the amount invested in the option.
Because counterparties do not take a
position in the underlying asset,
movements in the underlying asset
would not affect the payout received or
loss incurred. Full collateralization
prevents a DCO from being exposed to
credit risk stemming from the inability
of a clearing member or customer of a
clearing member to meet a margin call
or a call for additional capital. This
limited exposure and full
collateralization of that exposure
renders certain provisions of part 39
inapplicable or unnecessary. As a result,
the Division has granted relief from
certain provisions of part 39 to DCOs
that clear fully-collateralized
positions.63 With this release, the
Commission is proposing to codify this
relief and to provide clarity to DCOs and
future applicants for DCO registration
regarding how the regulations in part 39
apply to DCOs that clear fullycollateralized positions.64
63 See CFTC Letter No. 14–04 (January 16, 2014)
(granting exemptive relief to the North American
Derivatives Exchange, Inc. (Nadex)); CFTC Letter
No. 17–35 (July 24, 2017) (granting exemptive relief
to LedgerX).
64 The Division also issued interpretive guidance
to Nadex for other provisions in part 39. CFTC
Letter No. 14–05 (January 16, 2014). The
interpretive guidance may be relied on by third
parties, and is not impacted by this proposed
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Fully-collateralized positions do not
expose DCOs to many of the risks that
traditionally margined products do.
Therefore, the Commission is proposing
to amend certain part 39 regulations to
better accommodate fully-collateralized
positions, where full-collateralization
addresses the risks that the regulations
are meant to address.
The proposed amendments are based
on an assessment of how the DCO Core
Principles and part 39 apply to fullycollateralized positions, as well as the
relief previously granted to DCOs that
clear such positions. The Commission
believes the proposed amendments
would not negatively impact prudent
risk management at any DCO, regardless
of the types of products cleared.
1. Definition of ‘‘Fully-Collateralized
Positions’’—§ 39.2
The Commission is proposing to
define a ‘‘fully-collateralized position’’
as a contract cleared by a derivatives
clearing organization that requires the
derivatives clearing organization to
hold, at all times, funds in the form of
the required payment sufficient to cover
the maximum possible loss that a
counterparty could incur upon
liquidation or expiration of the contract.
2. Computation of Financial Resources
Requirement—§ 39.11(c)(1)
Regulation 39.11(a)(1) requires a DCO
to maintain financial resources
sufficient to meet its financial
obligations to its clearing members
notwithstanding a default by the
clearing member creating the largest
financial exposure for the DCO in
extreme but plausible market
conditions. Regulation 39.11(c)(1) 65
requires a DCO to perform monthly
stress testing in order to make a
reasonable calculation of the financial
resources it would need in the event of
such a default. Division staff has
expressed the view that a DCO can
satisfy the requirements of § 39.11(a)(1)
by clearing fully-collateralized
positions.66 For fully-collateralized
positions, a DCO holds its maximum
possible loss on each contract at all
times and does not face the risk of a
clearing member default. The monthly
stress tests required by § 39.11(c)(1)(i)
are therefore unnecessary for fullycollateralized positions. Accordingly,
the Commission is proposing to amend
§ 39.11(c)(1)(i) to clarify that a DCO does
65 Revisions contained elsewhere in this proposed
rulemaking would renumber this paragraph as
§ 39.11(c)(1)(i).
66 See CFTC Letter No. 14–05 (January 16, 2014)
(providing interpretive guidance to Nadex).
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not have to perform monthly stress tests
on fully-collateralized positions.
3. Liquidity of Financial Resources—
§ 39.11(e)(1)(ii)
Regulation 39.11(e)(1)(ii) requires a
DCO to have enough financial resources
to meet the requirements of § 39.11(a)(1)
that are sufficiently liquid to enable the
DCO to fulfill its obligations during a
one-day settlement cycle. The specific
amount of liquid resources a DCO must
hold is based on the historical
settlement pays of its clearing members.
A DCO maintains sufficient liquidity for
fully-collateralized positions by
requiring clearing members to post the
full potential loss of a position in the
form of the potential obligation.
Requiring collateral to be in the form of
the potential obligation eliminates the
risk that the DCO will not have
sufficient liquidity to meet its
obligations and the need for daily markto-market settlements. Further, if a DCO
were to complete the calculation
required by § 39.11(e)(1)(ii), the amount
would not change from day to day as the
DCO operates a fully-collateralized
model. As a result, the calculation
required in § 39.11(e)(1)(ii) is neither
necessary or applicable for fullycollateralized positions. The
Commission is therefore proposing to
amend § 39.11(e)(1)(iv) to clarify that
DCOs do not need to include fullycollateralized positions in the
calculation required thereunder.
4. Periodic Reporting of Participant
Eligibility—§ 39.12(a)(5)(i) and
(a)(5)(i)(B)
Regulation 39.12(a)(5)(i) requires a
DCO to require its clearing members to
provide the DCO with periodic financial
reports that allow the DCO to assess
whether participation requirements are
being met on an ongoing basis.
Regulation 39.12(a)(5)(i)(B) 67 requires a
DCO to make these reports available to
the Commission at the Commission’s
request.68 The Commission’s participant
eligibility requirements in § 39.12(a) are
intended to ensure that DCO
participants maintain sufficient
financial resources and operational
capacity to meet the obligations arising
from clearing at a DCO.69 Clearing
members that only clear fullycollateralized positions present no
67 Revisions contained elsewhere in this proposed
rulemaking would renumber § 39.12(a)(5)(i)(B) as
§ 39.12(a)(5)(iii).
68 Regulation 39.12(a)(5)(i)(B) allows DCOs to
either require clearing members to make the reports
available to the Commission or to provide the
reports to the Commission directly.
69 See Derivatives Clearing Organization General
Provisions and Core Principles, 76 FR at 69352.
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credit or default risk to the DCO because
their full potential loss is already held
by the DCO. Thus, periodic financial
reports from non-FCM clearing members
that only clear fully-collateralized
positions do not provide any risk
management benefit to DCOs. The
Commission therefore is proposing to
add new § 39.12(a)(5)(v) to exclude nonFCM clearing members that only clear
fully-collateralized positions from the
financial reporting requirements in
§ 39.12(a)(5)(i) and (a)(5)(i)(B).
5. Large Trader Stress Tests—
§ 39.13(h)(3)
Regulation 39.13(h)(3) requires a DCO
to conduct stress testing on a daily basis
with respect to each large trader who
poses significant risk to a clearing
member or the DCO, and at least on a
weekly basis with respect to each
clearing member account, by house
origin and by each customer origin. As
discussed above, DCOs hold, at all
times, the full potential loss of fullycollateralized positions cleared by the
DCO, and a DCO does not face the risk
of default from accounts that only hold
fully-collateralized positions. As a
result, such stress tests would not
provide DCOs new information on
accounts that only clear fullycollateralized positions. The
Commission is therefore proposing to
add new § 39.13(h)(3)(iii) to exclude
clearing member accounts that hold
only fully-collateralized positions from
the stress testing requirements in
§ 39.13(h)(3)(i) and (ii).
6. Daily Reporting—§ 39.19(c)(1)(i)
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Regulation 39.19(c)(1)(i) requires a
DCO to submit to the Commission a
daily report containing information on
initial margin, daily variation margin
payments, other daily cash flows, and
end-of-day positions. Because fullycollateralized positions do not pose a
credit risk to the DCO or other
participants, the Commission does not
need daily reporting of this information
with respect to fully-collateralized
positions. Therefore, the Commission is
proposing to amend § 39.19(c)(1)(i) such
that the enumerated daily reporting is
not required with respect to fullycollateralized positions.
V. Amendments to Part 39—Subpart
C—Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to
the Provisions
A. Financial Resources for SIDCOs and
Subpart C DCOs—§ 39.33
Regulation 39.33(a)(1) requires a
SIDCO or a subpart C DCO that is
systemically important in multiple
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jurisdictions, or that is involved in
activities with a more complex risk
profile, to maintain financial resources
sufficient to enable it to meet its
financial obligations to its clearing
members notwithstanding a default by
the two clearing members creating the
largest combined loss in extreme but
plausible market conditions. The
Commission is proposing to amend
§ 39.33(a)(1) by replacing the phrase
‘‘largest combined loss’’ with ‘‘largest
combined financial exposure’’ in order
to achieve consistency with the relevant
provisions of Commission regulations
and the CEA—specifically, § 39.11(a)(1)
and section 5b(c)(2)(B) of the CEA
regarding DCO financial resources
requirements.
Regulation 39.33(c)(1) requires a
SIDCO or subpart C DCO to maintain
eligible liquid resources sufficient to
meet its obligations to perform
settlements with a high degree of
confidence under a wide range of stress
scenarios that should include the
default of the clearing member creating
the largest aggregate liquidity obligation
for the SIDCO or subpart C DCO. The
Commission is proposing to amend
§ 39.33(c)(1) by adding the phrase ‘‘in
all relevant currencies’’ to clarify that
the ‘‘largest aggregate liquidity
obligation’’ means the total amount of
cash, in each relevant currency, that the
defaulted clearing member would be
required to pay to the DCO during the
time it would take to liquidate or
auction the defaulted clearing member’s
positions, as reasonably modeled by the
DCO. When evaluating its largest
aggregate liquidity obligation on a dayto-day basis over a multi-day period, a
SIDCO or subpart C DCO may use its
liquidity risk management model.
Regulation 39.33(d) requires a SIDCO
or a subpart C DCO to undertake due
diligence to confirm that each of its
liquidity providers has the capacity to
perform its commitments to provide
liquidity, and to regularly test its own
procedures for accessing its liquidity
resources. The Commission is proposing
to additionally require a SIDCO with
access to deposit accounts and related
services at a Federal Reserve Bank to
use such services where practical. This
requirement would further enhance a
SIDCO’s financial integrity and
management of liquidity risk.70
B. Risk Management for SIDCOs and
Subpart C DCOs—§ 39.36
Regulation 39.36 requires a SIDCO or
a subpart C DCO to conduct stress tests
of its financial and liquidity resources
and to regularly conduct sensitivity
analyses of its margin models. The
Commission is proposing to amend
§ 39.36(a)(6) to clarify that a SIDCO or
subpart C DCO that is subject to the
minimum financial resources
requirement set forth in § 39.11(a)(1),
rather than § 39.33(a), should use the
results of its stress tests to support
compliance with that requirement.
The Commission is also proposing to
amend § 39.36(b)(2)(ii) to replace the
words ‘‘produce accurate results’’ with
‘‘react appropriately’’ to more accurately
reflect that the purpose of a sensitivity
analysis is to assess whether the margin
model will react appropriately to
changes of inputs, parameters, and
assumptions. The Commission is also
proposing to amend § 39.36(d), which
requires each SIDCO and subpart C DCO
to ‘‘regularly’’ conduct an assessment of
the theoretical and empirical properties
of its margin model for all products it
clears, to clarify that the assessment
should be conducted ‘‘on at least an
annual basis (or more frequently if there
are material relevant market
developments).’’
The Commission is also proposing to
amend § 39.36(e) by adding the heading
‘‘[i]ndependent validation’’ to the
provision.
70 Under section 806(a) of the Dodd-Frank Act, 12
U.S.C. 5465(a), the Board of Governors of the
Federal Reserve System may authorize a Federal
Reserve Bank to establish and maintain an account
for a financial market utility (FMU), which includes
a SIDCO. A SIDCO with access to accounts and
services at a Federal Reserve Bank is required to
comply with related rules published by the Board
of Governors of the Federal Reserve System. See
generally Financial Market Utilities, 78 FR 76973
(Dec. 20, 2013) (final rules adopted by the Board of
Governors to govern accounts held by designated
FMUs).
71 See CMPI–IOSCO, Principles for Financial
Market Infrastructures: Disclosure Framework and
Assessment Methodology (Dec. 2012), available at
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD396.pdf.
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C. Additional Disclosure for SIDCOs
and Subpart C DCOs—§ 39.37
Regulation 39.37(a) and (b) requires a
SIDCO or a subpart C DCO to publicly
disclose its responses to the CPMI–
IOSCO Disclosure Framework 71 and, in
order to ensure the continued accuracy
and usefulness of its responses, to
review and update them at least every
two years and following material
changes to the SIDCO’s or subpart C
DCO’s system or environment in which
it operates. The Commission is
proposing to amend § 39.37(b) to
additionally require that a SIDCO or a
subpart C DCO provide notice to the
Commission of any such updates to its
responses following material changes to
its system or environment no later than
ten business days after the updates are
made. Further, such notice would have
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to be accompanied by a copy of the text
of the responses, specifying the changes
that were made to the latest version of
the responses. Providing this notice
would ensure that the Commission has
access to the most current information
available and would enable the
Commission to identify changes since
the last update to the disclosure
responses.
Regulation 39.37(c) requires a SIDCO
or a subpart C DCO to disclose, to the
public and to the Commission, relevant
basic data on transaction volume and
values. In adopting this provision, the
Commission noted that this requirement
was intended to be consistent with the
then-forthcoming quantitative
disclosure standards being developed by
CPMI–IOSCO.72 On February 26, 2015,
CPMI–IOSCO published the Public
Quantitative Disclosure Standards for
Central Counterparties.73 The
Commission is proposing to amend
§ 39.37(c) to explicitly state that a
SIDCO or a subpart C DCO must
disclose relevant basic data on
transaction volume and values that are
consistent with the standards set forth
in the CPMI–IOSCO Public Quantitative
Disclosure Standards for Central
Counterparties.
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D. Corrections to Subpart C Regulations
The Commission is proposing to
amend § 39.39(a)(2) to change the word
‘‘or’’ to ‘‘of.’’
VI. Amendments to Appendix A to Part
39—Form DCO
To request registration as a DCO,
§ 39.3(a)(2) requires an applicant to file
a complete Form DCO, which includes
a cover sheet, all applicable exhibits,
and any supplemental materials, as
provided in appendix A to part 39. The
Commission uses Form DCO, which is
comprised of a series of different
exhibits that require the applicant to
provide details of its operations, to
determine whether the applicant
demonstrates compliance with the Act
and applicable Commission regulations.
Applicants must also use Form DCO to
amend a pending application or request
an amended order of registration.
The Commission is proposing to
amend Form DCO to better describe the
required exhibits in a manner that is
consistent with the proposed
amendments to the relevant regulations
as described herein. For example, the
Commission proposes to amend Exhibit
72 Derivatives Clearing Organizations and
International Standards, 78 FR at 72493.
73 See CPMI–IOSCO, Public Quantitative
Disclosure Standards for Central Counterparties
(Feb. 2015), available at https://www.bis.org/cpmi/
publ/d125.pdf.
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A–11 to incorporate the more flexible
CCO reporting structure that the
Commission is proposing in
§ 39.10(c)(1)(ii); add proposed Exhibit
A–12 to describe a DCO’s enterprise risk
management program as consistent with
newly proposed § 39.10(d); amend
Exhibit B–1 to incorporate proposed
amendments to the Commission’s
financial resources requirements in
proposed § 39.11; and amend Exhibits
O, P and Q to reflect the Commission’s
proposed amendments to §§ 39.24,
39.25, and 39.26 which would
incorporate the specific governance
arrangement, conflict of interest, and
board composition requirement, which
are currently only detailed in § 39.32 for
SIDCOs and subpart C DCOs.
The Commission is also proposing to
amend Form DCO to update the form to
reflect the Commission’s other
rulemaking efforts. For example, the
Commission proposes to amend Exhibit
A–6 to update the reference from public
director to independent director to
remove terminology that was proposed
but not ultimately adopted by the
Commission for certain governance
requirements, and amend Exhibit F–2 to
include cross-references to Commission
regulations in part 22 which was
adopted after the Commission adopted
part 39.
The Commission also proposes to
amend Form DCO to eliminate
information that has proven to be
unnecessary to determine an applicant’s
compliance with the Act and applicable
Commission regulations. For example,
the Commission proposes to eliminate
the requirement within Exhibit A–6 that
an applicant provide contact
information for each officer, director,
governor, general partners, LLC
managers, and all standing committee
members. Lastly, the Commission also
proposes to remove references within
the Form DCO instructions to use the
form to request an amended order of
registration. The Commission intends
for these proposed Form DCO changes
to establish a clearer application process
for applicants that also provides the
Commission with improved information
to determine compliance with the Act
and Commission regulations.
VII. Amendments to Appendix B to Part
39—Subpart C Election Form
The Commission is proposing to
amend the subpart C Election Form to
better reflect the requirements in
subpart C of part 39 and to more closely
align the format of the subpart C
Election Form with Form DCO by
specifying the information and/or
documentation that must be provided
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by a DCO as part of its petition for
subpart C election.
Currently, unlike Form DCO, the
subpart C Election Form references the
corresponding regulations in subpart C,
but does not specify the type or level of
information that must be filed as an
exhibit. In order to more closely align
the format of the subpart C Election
Form with Form DCO, the Commission
is proposing to amend the subpart C
Election Form to reflect the
requirements of subpart C.
VIII. Amendments to Part 140—
Organization, Functions, and
Procedures of the Commission
Regulation 140.94 includes delegation
of authority from the Commission to the
Director of the Division of Clearing and
Risk. The Commission is proposing to
revise § 140.94 to conform to the
changes to part 39 it is proposing in this
release.
IX. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
requires that agencies consider whether
the regulations they propose will have
a significant economic impact on a
substantial number of small entities
and, if so, provide a regulatory
flexibility analysis on the impact.74 The
regulations proposed by the
Commission will affect only DCOs. The
Commission has previously established
certain definitions of ‘‘small entities’’ to
be used by the Commission in
evaluating the impact of its regulations
on small entities in accordance with the
RFA.75 The Commission has previously
determined that DCOs are not small
entities for the purpose of the RFA.76
Accordingly, the Chairman, on behalf of
the Commission, hereby certifies
pursuant to 5 U.S.C. 605(b) that the
proposed regulations will not have a
significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act
The Paperwork Reduction Act
(PRA) 77 provides that Federal agencies,
including the Commission, may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a valid
control number from the Office of
Management and Budget (OMB). This
proposed rulemaking contains reporting
and recordkeeping requirements that are
collections of information within the
meaning of the PRA. If adopted,
74 5
U.S.C. 601 et seq.
FR 18618 (Apr. 30, 1982).
76 See 66 FR 45604, 45609 (Aug. 29, 2001).
77 44 U.S.C. 3501 et seq.
75 47
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responses to the collections of
information would be required to obtain
a benefit. This section addresses the
impact that the proposal will have on
existing information collection
requirements associated with part 39.
Additionally, the Commission is
consolidating four collections of
information relating to requirements
under part 39.78 The requirements
covered by all four existing collections
will be combined in OMB control
number 3038–0076, which will be
renamed as ‘‘Requirements for
Derivatives Clearing Organizations,’’
and OMB control numbers 3038–0066,
3038–0069, and 3038–0081 will be
cancelled. Changes to the existing
information collection requirements as a
result of this proposal are set forth
below.
1. Subpart A—General Requirements
Applicable to DCOs
Subpart A establishes the procedures
and information required for
applications for registration as a DCO,
including submission of a completed
Form DCO accompanied by all
applicable exhibits. Form DCO is
covered by OMB control number 3038–
0076. Currently, collection 3038–0076
reflects that there are 3 applicants for
DCO registration annually and that it
takes 400 hours to complete and submit
the form, including all exhibits. The
Commission is reducing the number of
potential applicants for DCO registration
to two annually, based on recent
numbers of applications filed. The
Commission is proposing to modify and
update Form DCO to conform it to the
proposed revisions to part 39.
Additionally, the Commission is
proposing to apply certain governance
requirements applicable to SIDCOs and
subpart C DCOs to all DCOs. This
necessitates moving the corresponding
burden hours from the subpart C
Election Form to Form DCO.
Specifically, 22 burden hours per
respondent for the subpart C Election
Form—Exhibits A through G, currently
under OMB control number 3038–0081,
would transfer to the Form DCO burden
per respondent in OMB control number
3038–0076.
The proposal would eliminate the
requirement for DCOs to use Form DCO
to request an amended order of DCO
78 The four collections are: OMB Control No.
3038–0066, Financial Resources Requirements for
Derivatives Clearing Organizations; OMB Control
No. 3038–0081, General Regulations and
Derivatives Clearing Organizations; OMB Control
No. 3038–0069, Information Management
Requirements for Derivatives Clearing
Organizations; and OMB Control No. 3038–0076,
Risk Management Requirements for Derivatives
Clearing Organizations.
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registration. The Commission estimates
the burden hours per respondent would
decrease by one hour due to the
proposed change to § 39.3(a)(2) that
would no longer require a DCO seeking
to amend its order of registration to
submit Form DCO. The new aggregate
proposed estimate for Form DCO is as
follows:
Form DCO—§ 39.3(a)(2)
Estimated number of respondents: 2.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
421.
Estimated gross annual reporting
burden: 842.
The Commission also is proposing to
amend certain existing provisions of
§ 39.3 regarding requests for extension
of the review of a DCO application,
vacation of a DCO’s registration, and
transfer of positions. The Commission is
proposing to adopt new § 39.3(a)(6),
which would permit the Commission to
extend the 180-day review period for
DCO applications specified in
§ 39.3(a)(1) for any period of time to
which the applicant agrees in writing.
Although this is not a new practice, it
was not previously accounted for
separately in this information
collection. The Commission is
estimating that there would be two
requests for extension of the DCO
application per year, one per
respondent, and that it will take one
hour per report. The new aggregate
proposed estimate for the agreement in
writing to extend the application review
period pursuant to § 39.3(a)(6) is as
follows:
Estimated number of respondents: 2.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
1.
Estimated gross annual reporting
burden: 2.
The Commission is proposing to
amend § 39.3(e) to codify statutory
requirements regarding vacation of
registration. The proposed changes
would specify information that a DCO
must include in its request to vacate,
and require a DCO to continue to
maintain its books and records after its
registration has been vacated for the
requisite statutory and regulatory
retention periods. The Commission
estimates that there would be one
request to vacate every three years and
that it would take three hours per
report. The annual aggregate burden for
the request to vacate requirement has
been divided to reflect the estimate of
one request to vacate a DCO registration
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pursuant to § 39.3(e)(1) every three years
as follows:
Estimated number of respondents: 1.
Estimated number of reports per
respondent: 0.33.
Average number of hours per report:
1.
Estimated gross annual reporting
burden: 1.
For recordkeeping by a DCO that has
requested to vacate its registration, the
Commission is adding this
recordkeeping burden to OMB control
number 3038–0076, which currently
includes 16 responses and 50 burden
hours for the recordkeeping requirement
of registered DCOs. The Commission is
also transferring the 100 recordkeeping
burden hours currently contained in
OMB control number 3038–0069 to
OMB control number 3038–0076. The
burden for the request to vacate
requirement has been divided to reflect
the estimate of one record of the request
to vacate a DCO registration pursuant to
§ 39.3(e)(1) every three years. The
combined annual aggregate
recordkeeping burden estimate for
subparts A and B of part 39 under OMB
control number 3038–0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
150.
Estimated number of respondentsrequest to vacate: 1.
Estimated number of reports per
respondent-request to vacate: 0.33.
Average number of hours per reportrequest to vacate: 1.
Estimated gross annual recordkeeping
burden: 2,401.79
The Commission is proposing changes
to § 39.3(f), to be renumbered as
§ 39.3(g), to simplify the requirements
for requesting a transfer of open interest.
The rule submission filing is covered by
OMB control number 3038–0093, which
reflects that there are 50 reports
annually and that it takes two hours per
response. The Commission is of the
view that to the extent that the transfer
of open interest request would be
submitted as part of a new rule or rule
amendment filing pursuant to § 40.5, the
proposed change is already covered by
OMB control number 3038–0093 and
there is no change in the burden
estimates.
79 The total annual recordkeeping burden
estimate reflects the combined figures for 16
registered DCOs with an annual burden of one
response and 150 hours per response (16 × 1 × 150
= 2,400), and one vacated DCO registration every
three years with an annual burden of one hour.
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2. Subpart B—Requirements for
Compliance With Core Principles
a. CCO Annual Reporting
Requirements—§ 39.10(c)
Currently, § 39.10(c)(3) requires the
CCO of a DCO to prepare, and to submit
to the Commission and the DCO’s board
of directors, an annual compliance
report containing specified information
regarding the DCO’s compliance with
the core principles and Commission
regulations. The burden for CCO annual
reports, which is currently covered by
OMB control number 3038–0081, is
being moved to OMB control number
3038–0076. OMB control number 3038–
0081 reflects that there are 12
respondents that submit CCO annual
reports annually and that it takes 80
hours to complete and submit the
report, and 960 hours in the aggregate.
The number of respondents is being
updated to 16 to reflect the current
number of registered DCOs. The
Commission is proposing to allow a
DCO to incorporate by reference certain
sections of prior annual compliance
reports. Specifically, if the sections of
the CCO annual report that describe the
DCO’s compliance policies and
procedures have not materially changed,
the current report may reference a prior
year’s report, provided that the
referenced report was filed within the
prior five years. The Commission
estimates that this change should
decrease the burden of preparing the
CCO annual report by ten hours per
respondent, and 160 hours in aggregate,
by not requiring the report to repeat
potentially lengthy descriptions of
policies and procedures that have
already been adequately described in a
CCO annual report previously submitted
to the Commission.
The Commission is proposing to
specify that the CCO annual report must
identify, by name, rule number, or other
identifier, the policies and procedures
intended to comply with each core
principle and applicable regulation. The
Commission estimates the proposed
change would add two hours to the
burden of preparing each report, and 32
hours in the aggregate. Lastly, the
Commission is proposing to amend
§ 39.10(c)(4) to require that the CCO
annual report describe the process by
which the report is submitted to the
DCO’s board or senior officer. This
requirement would require DCOs to
memorialize in the report a process they
are already required to follow.
Nonetheless, the Commission
anticipates an increase of one hour in
the burden for each report, and 16 hours
in the aggregate due to this proposed
change. Overall, the Commission
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estimates that the net impact of these
increases and reductions to the CCO
annual report burden due to the
proposed changes is expected to be a
decrease of seven hours per respondent
in the existing information collection
burden associated with the CCO annual
report.80 The aggregate proposed
estimate for the CCO annual report is as
follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
73.
Estimated gross annual reporting
burden: 1,168.
b. Cross-Margining Programs
The Commission is proposing to add
§ 39.13(i), which would set forth the
procedure for DCOs to submit
information related to their proposed
cross-margining programs with other
DCOs (or other clearing organizations).
Proposed § 39.13(i) would specify the
information that a DCO would need to
provide to the Commission regarding its
cross-margining program and require
that the DCO submit this information as
part of a rule filing submitted for
Commission approval pursuant to
§ 40.5. The rule submission filing is
covered by OMB control number 3038–
0093, which reflects that there are 50
reports annually and that it takes 2
hours per response. The Commission is
of the view that to the extent that the
cross-margining program would be
submitted as part of a new rule or rule
amendment filing pursuant to § 40.5, the
proposed changes is already covered by
OMB control number 3038–0093 and
there is no change in the burden
estimates.
c. Financial Resources Reporting
i. Annual Financial Reports
Existing § 39.11(f) requires DCOs to
provide to the Commission quarterly
reports of their financial resources, and
§ 39.19(c)(3) requires DCOs to prepare
and submit audited annual financial
statements. The Commission is
proposing to add § 39.11(f)(2), which
would incorporate in § 39.11 the annual
reporting requirement that currently
80 The existing burden estimate for the CCO
annual report is 80 hours per response. For the new
estimate, the Commission is subtracting ten hours
for the proposal not to require restatement of
information that has not changed from the prior
report, adding two hours for the proposal to require
references to rules and policies, and one hour for
the proposal to require that the report include
documentation of the process of providing the
report to the board, for a net burden per respondent
of 73 hours. The recordkeeping burden is covered
by OMB Control No. 3038–0076 and it is not
affected by the proposal.
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22249
exists in § 39.19(c)(3). This change
simply moves the existing requirement
to a different location, and does not alter
the existing information collection
burden associated with this
requirement. Accordingly, the burden
for annual financial reports is being
moved from OMB control number 3038–
0069 to OMB control number 3038–
0076, and the burden for quarterly
financial reports is being moved from
OMB control number 3038–0066 to
OMB control number 3038–0076. The
Commission is cancelling OMB control
numbers 3038–0069 and 3038–0066.
The Commission also is proposing to
require in § 39.11(f)(2) that,
concurrently with filing the required
annual financial report, a DCO also
provide: (1) A reconciliation, including
appropriate explanations, of its balance
sheet in the certified annual financial
statements with the DCO’s most recent
quarterly report when material
differences exist or, if no material
differences exist, a statement so
indicating, and (2) such further
information as may be necessary to
make the required statements not
misleading. The Commission estimates
that the proposed change would add an
additional 20 hours per report, and 320
hours in the aggregate, to the current
burden of 2,606 hours per respondent,
and 41,696 hours, in OMB control
number 3038–0069, which as noted
above, is being moved to OMB control
number 3038–0076.
Finally, the Commission is proposing
in § 39.11(f)(2)(i) that the annual report
be required to identify the DCO’s own
capital allocated to the DCO’s
compliance with § 39.11(a)(1), and also
identify each of the DCO’s financial
resources allocated to the DCO’s
compliance with § 39.11(a)(2). The
Commission estimates that the proposed
change would add an additional 14
hours per report and 224 hours in the
aggregate to the current burden of 2,606
hours per respondent, and 41,696 hours,
in OMB control number 3038–0069,
which as noted above, is being moved
to OMB control number 3038–0076.
The Commission estimates that the
aggregate result of these changes will be
to increase the information collection
burden associated with annual financial
reports from 2,606 hours to 2,640 hours
for each DCO. The revised estimated
aggregate burden for the audited annual
financial statements is as follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
2,640.
Estimated gross annual reporting
burden: 42,240.
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ii. Quarterly Financial Reports
The Commission is proposing to
remove from § 39.11(f)(3) the
requirement that certain documentation
be filed quarterly; instead, DCOs would
only need to include the information in
their first quarterly report submission
and upon any subsequent change, for an
expected reduction of three hours per
report. Proposed § 39.11(f)(1)(v) would
require a DCO to identify in its quarterly
report the financial resources allocated
to meeting its obligations under
§ 39.11(a)(1) and (2), with an expected
increase of one hour per report. The
Commission has adjusted the existing
burden hours for quarterly reporting to
reflect these proposed changes, which
result in an overall reduction in burden
of two hours per report from the total
estimated burden reflected in OMB
control number 3038–0066. The
estimated aggregate burden for the
quarterly reports, as amended by the
proposal is as follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 4.
Average number of hours per report:
8.
Estimated gross annual reporting
burden: 512.
The Commission is also proposing to
amend § 39.11(f)(1)(ii), which requires a
DCO to file with the Commission a
financial statement of the DCO or of its
parent company. The Commission is
proposing to amend § 39.11(f)(1)(ii) to
require that the financial statement
provided be that of the DCO and not the
parent company. The Commission is
further proposing to amend the periodic
financial reporting requirements in
§ 39.11(f)(1)(ii) and (f)(2)(i) to permit
quarterly and annual financial
statements to be prepared in accordance
with U.S. GAAP for DCOs incorporated
or organized under U.S. law and in
accordance with either U.S. GAAP or
IFRS for DCOs incorporated or
organized under the laws of any foreign
country. These changes are not expected
to affect the burden.
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d. Daily Reporting
The Commission is proposing to
amend § 39.19(c)(1)(i)(A)–(C), which
requires a DCO to report margin, cash
flow, and position information by house
origin and separately by customer
origin, to report this information by
individual customer account as well.
The Commission is also proposing to
amend § 39.19(c)(1)(i)(D) to specify that,
with respect to end-of-day position
information, DCOs must report both
unadjusted and risk-adjusted position
information. The burden associated
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with these proposed changes is
anticipated to result in an increase from
0.1 to 0.5 hours per report, and 2,000 in
the aggregate. The burden increase for
daily financial reports is being moved
from OMB control number 3038–0069 to
OMB control number 3038–0076.
Separately, the Commission is
proposing changes to § 39.19(c)(1)(i) that
would codify relief previously granted
to fully-collateralized DCOs that would
reduce their daily reporting burden by
not requiring information on initial
margin, daily variation margin
payments, other daily cash flows, and
end-of-day positions. The proposed
change would reduce the burden for
fully-collateralized DCOs, but would not
affect the burden for the majority of
DCOs that are subject to daily reporting
requirements. The revised aggregate
burden estimate for daily reporting
being transferred to OMB control
number 3038–0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 250.
Average number of hours per report:
0.5.
Estimated gross annual reporting
burden: 2,000.
The Commission is proposing
amendments to § 39.13(g)(8)(i)(B) to
require a DCO to have rules requiring its
clearing members to report customer
information about futures (as well as
swaps) to DCOs. This is a new
information collection that is not
covered by an existing OMB control
number. The burden applicable to
clearing members is estimated as
follows:
Estimated number of respondents: 64.
Estimated number of reports per
respondent: 250.
Average number of hours per report:
0.2.
Estimated gross annual reporting
burden: 3,200.
e. Event-Specific Reporting
Regulations 39.18(g) and (h) require a
DCO to provide notice regarding certain
exceptional events or planned changes
related to a DCO’s automated systems.
These notice requirements are
incorporated by reference in
§ 39.19(c)(4). Regulation 39.19(c)(4) also
requires a DCO to notify the
Commission of the occurrence of other
specified events; for example, a decrease
in financial resources or the default of
a clearing member. The information
collection burden associated with these
notices required under § 39.19(c)(4) is
currently addressed by OMB Control
No. 3038–0069, but is being moved to
OMB control number 3038–0076 and
consolidated with the burden in OMB
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control number 3038–0076 that is
currently associated with § 39.18(g) and
(h). In addition, the Commission is
proposing to add to § 39.19(c)(4) several
events for which DCOs will be required
to provide notification if such events
occur.
The Commission is also proposing to
amend § 39.16(c)(2)(ii) to require that a
DCO provide immediate public notice of
a declaration of default on its website.
The estimated burden of proposed
§ 39.16(c)(2)(ii) is included in the
estimate for event-specific reporting
because it would occur concurrently
with the requirement under
§ 39.19(c)(4)(vii) that a DCO provide
immediate notice to the Commission
regarding the default of a clearing
member.
The burden associated with these
proposed changes pursuant to
§ 39.19(c)(4) is anticipated to result in
an increase in the number of reports by
DCO per year on average, from four to
20, and a reduction in the hour burden
per response, which was previously
overstated, from six to 0.5 hours,
because a DCO is required to provide a
brief notice with only the pertinent
details of the incident. The aggregate
revised burden estimate of § 39.19(c)(4)
being transferred to OMB control
number 3038–0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 20.
Average number of hours per report:
0.5.
Estimated gross annual reporting
burden: 160.
f. Public Information
The Commission is proposing to
revise § 39.21 to clarify that information
regarding the financial resource package
available in the event of a clearing
member default, which a DCO is
required to post on its website pursuant
to § 39.21, should be updated at least
quarterly, consistent with the
requirement in § 39.11(f)(1)(i)(A) to
report this information to the
Commission each fiscal quarter or at any
time upon Commission request. The
Commission is also clarifying that other
information specified in § 39.21 must be
disclosed separately on the DCO’s
website, and not provided solely in the
DCO’s posted rulebook. This is a new
information collection that is not
covered by an existing OMB control
number. The proposed changes are
estimated to add an average of two
hours per response, and eight hours per
respondent annually (4 quarterly reports
× 2 hours per report) to OMB control
number 3038–0076, for an aggregate
estimated burden as follows:
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Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 4.
Average number of hours per report:
2.
Estimated gross annual reporting
burden: 128.
g. Governance
As noted above, the Commission is
proposing to incorporate governance
provisions from subpart C, which only
applies to a limited subset of DCOs, into
subpart B, which is applicable to all
DCOs. Therefore, the information
collection burden currently associated
with the governance standards of
§ 39.32, which results from required
disclosure of major board decisions and
governance arrangements, has been
reallocated to § 39.24. The burden
associated with subpart C governance
provisions, which is currently covered
by OMB control number 3038–0081, is
being moved to OMB control number
3038–0076. The aggregate burden of
these requirements would increase
because they will be applicable to all
registered DCOs. The new aggregate
burden estimate for proposed § 39.24
that is associated with the required
ongoing disclosure of major board
decisions and governance arrangements
by registered DCOs, including DCOs
that are not currently subject to subpart
C, is estimated as follows:
Estimated number of respondents: 16.
Estimated number of reports per
respondent: 6.
Average number of hours per report:
3.
Estimated gross annual reporting
burden: 288.
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h. Legal Risk
Proposed changes to § 39.27 would
require a DCO that provides clearing
services outside the United States to
ensure that the legal opinion that a DCO
must obtain to provide those services is
accurate and up to date. The new
subsection also requires the DCO to
submit an updated legal memorandum
to the Commission following all
material changes to the analysis or
content contained in the memorandum.
This requirement would apply only to
DCOs offering clearing services outside
the U.S. This is a new information
collection that is not covered by an
existing OMB control number. The
Commission expects that circumstances
necessitating submission of an updated
legal memorandum will occur
infrequently, not more than once every
three years, and has estimated the
aggregate burden as follows:
Estimated number of respondents: 1.
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Estimated number of reports per
respondent: 0.33.
Average number of hours per report:
20.
Estimated gross annual reporting
burden: 6.6.
3. Subpart C—Provisions Applicable
to SIDCOs and DCOs That Elect To Be
Subject to the Provisions of Subpart C
Because the Commission is proposing
to remove and reserve § 39.32 and
Exhibit B of the subpart C Election Form
and to move the governance
requirements to Form DCO and § 39.24,
the corresponding information
collection burden under § 39.32,
currently covered by OMB control
number 3038–0081 would be eliminated
and the burden under the subpart C
Election Form would be reduced.
Further, in consolidating the burden for
subpart C, currently in OMB control
number 3038–0081, with OMB control
number 3038–0076, the Commission has
reassessed the burden for the subpart C
Election Form, and is adjusting certain
burden hour estimates and numbers of
respondents. Specifically, the
Commission is reducing the number of
burden hours estimated for the
certification portion of the subpart C
Election Form from 25 hours to 2 hours,
because the prior estimate overstated
the burden necessary to prepare the onepage certification. The burden that is
currently estimated separately for the
certifications, exhibits, and
supplements/amendments to the
subpart C Election Form have been
combined because a DCO must provide
all the required information in order to
submit a complete subpart C Election
Form.81
Additionally, the Commission is
proposing to update the estimated
numbers of respondents for subpart C to
reflect the current number of SIDCOs
and subpart C DCOs, and a reduction,
from five to one, in the anticipated
number of DCOs newly electing to be
subject to subpart C. The Commission is
also updating the number of responses
for the rescission notices that must be
provided to clearing members based on
an average of the current number of
clearing members at subpart C DCOs.
The Commission also is combining
81 The current burden for the subpart C Election
Form exhibits is 155 hours per response; 22 of these
hours are being moved to the Form DCO burden as
discussed in the Form DCO section above, leaving
133 hours. Also, the Commission is reducing the
burden currently attributed to amendments to the
subpart C Election Form and consolidating it with
the burden for supplemental information because in
practice, DCOs have not frequently filed
amendments. Consolidating the certification (2
hours), exhibits (133 hours), and supplemental or
amended information (45 hours) results in a burden
of 180 hours.
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22251
burden estimates that previously were
estimated separately for SIDCOs only
and for all subpart C DCOs; that
distinction was made in the initial
implementation of subpart C but is no
longer necessary since the subpart C
rules have been in place for several
years. The revised estimated aggregate
reporting burden related to the subpart
C Election Form, notices and disclosure
being transferred to OMB control
number 3038–0076 is as follows:
Subpart C Election Form
Estimated number of respondents: 1.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
180.
Estimated gross annual reporting
burden: 180.
Subpart C Withdrawal Notice
Estimated number of respondents: 1.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
2.
Estimated gross annual reporting
burden: 2.
Subpart C Rescission Notice
Estimated number of respondents: 1.
Estimated number of reports per
respondent: 16.
Average number of hours per report:
3.
Estimated gross annual reporting
burden: 48.
PFMI Disclosures
Estimated number of respondents: 1.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
200.
Estimated gross annual reporting
burden: 200.
Quantitative Disclosures
Estimated number of respondents: 1.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
80.
Estimated gross annual reporting
burden: 80.
Additionally, the Commission is
proposing to add to § 39.37 a
notification requirement regarding
changes to the PFMI disclosure
framework for SIDCOs and subpart C
DCOs, which is expected to increase, by
one hour, the existing information
collection burden of 80 hours per
response. The aggregate estimated
burden for § 39.37 is stated below:
Subpart C Disclosure Framework
Requirements—§ 39.37
Estimated number of respondents: 9.
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Estimated number of reports per
respondent: 1.
Average number of hours per report:
81.
Estimated gross annual reporting
burden: 729.
Because the Commission is moving all
of the burden estimates for subpart C
from OMB control number 3038–0081 to
OMB control number 3038–0076 and
cancelling information collection 3038–
0081, the existing burden estimates for
§§ 39.33, 39.36, 39.38, and 39.39, and
certain disclosures under § 39.37, as
updated to reflect the current number of
SIDCOs and subpart C DCOs, are
restated below. In addition, for the
quantitative disclosures required under
§ 39.37, which may be updated as
frequently as quarterly, the Commission
has updated the number of reports per
respondent from one to four annually,
and has distributed the existing 35
burden hours among the four reports
(35/4 = 8.75, rounded to 9). The updated
subpart C reporting burden estimates for
the changes to subpart C—Provisions is
as follows:
Subpart C Financial and Liquidity
Resource Documentation—§ 39.33
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
120.
Estimated gross annual reporting
burden: 1080.
Subpart C Stress Test Results—§ 39.36
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 16.
Average number of hours per report:
14.
Estimated gross annual reporting
burden: 2016.
Subpart C Quantitative Disclosures—
§ 39.37
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Estimated number of respondents: 9.
Estimated number of reports per
respondent: 4.
Average number of hours per report:
9.
Estimated gross annual reporting
burden: 324.
Subpart C Transaction, Segregation and
Portability Disclosures—§ 39.37
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
35.
Estimated gross annual reporting
burden: 315.
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Subpart C Efficiency and Effectiveness
Review—§ 39.38
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
3.
Estimated gross annual reporting
burden: 27.
Subpart C Recovery and Wind-down
Plan—§ 39.39
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 1.
Average number of hours per report:
480.
Estimated gross annual reporting
burden: 4,320.
With respect to the subpart C
recordkeeping burden that the
Commission is moving from OMB
control number 3038–0081 to OMB
control number 3038–0076, the
Commission also has combined the
burden estimates for financial and
liquidity resources, and liquidity
resource due diligence and testing
because these requirements apply to the
same set of respondents. As noted
above, the general recordkeeping
requirements that were previously
estimated separately for SIDCOs and all
subpart C DCOs also have been
combined. The updated subpart C
recordkeeping burden estimates are
restated below:
Subpart C Recordkeeping—General
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 110.
Average number of hours per report:
10.
Estimated gross annual recordkeeping
burden: 9,900.
Subpart C Recordkeeping—Financial
and Liquidity Resources, Liquidity
Resource Due Diligence and Testing
Estimated number of respondents: 9.
Estimated number of reports per
respondent: 8.
Average number of hours per report:
10.
Estimated gross annual recordkeeping
burden: 720.
Request for Comment
The Commission invites the public
and other Federal agencies to comment
on any aspect of the proposed
information collection requirements
discussed above. The Commission will
consider public comments on this
proposed collection of information in:
(1) Evaluating whether the proposed
collection of information is necessary
for the proper performance of the
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functions of the Commission, including
whether the information will have a
practical use;
(2) Evaluating the accuracy of the
estimated burden of the proposed
collection of information, including the
degree to which the methodology and
the assumptions that the Commission
employed were valid;
(3) Enhancing the quality, utility, and
clarity of the information proposed to be
collected; and
(4) Minimizing the burden of the
proposed information collection
requirements on registered entities,
including through the use of appropriate
automated, electronic, mechanical, or
other technological information
collection techniques, e.g., permitting
electronic submission of responses.
Copies of the submission from the
Commission to OMB are available from
the CFTC Clearance Officer, 1155 21st
Street, NW, Washington, DC 20581,
(202) 418–5160 or from https://
RegInfo.gov. Organizations and
individuals desiring to submit
comments on the proposed information
collection requirements should send
those comments to:
• The Office of Information and
Regulatory Affairs, Office of
Management and Budget, Room 10235,
New Executive Office Building,
Washington, DC 20503, Attn: Desk
Officer of the Commodity Futures
Trading Commission;
• (202) 395–6566 (fax); or
• OIRAsubmissions@omb.eop.gov
(email).
Please provide the Commission with
a copy of submitted comments so that
all comments can be summarized and
addressed in the final rulemaking, and
please refer to the ADDRESSES section of
this rulemaking for instructions on
submitting comments to the
Commission. OMB is required to make
a decision concerning the proposed
information collection requirements
between 30 and 60 days after
publication of this release in the Federal
Register. Therefore, a comment to OMB
is best assured of receiving full
consideration if OMB receives it within
30 calendar days of publication of this
release. Nothing in the foregoing affects
the deadline enumerated above for
public comment to the Commission on
the proposed rules.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the
Commission to consider the costs and
benefits of its actions before
promulgating a regulation under the
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CEA or issuing certain orders.82 Section
15(a) further specifies that the costs and
benefits shall be evaluated in light of the
following five broad areas of market and
public concern: (1) Protection of market
participants and the public; (2)
efficiency, competitiveness, and
financial integrity of futures markets; (3)
price discovery; (4) sound risk
management practices; and (5) other
public interest considerations. The
Commission considers the costs and
benefits resulting from its discretionary
determinations with respect to the
section 15(a) factors (collectively
referred to herein as section 15(a)
factors). The Commission has not
identified any impact that the proposed
changes to part 39 would have on price
discovery. The impact the proposed
changes to part 39 would have on the
other section 15(a) factors is considered
below.
The Commission recognizes that the
proposed rules may impose costs. The
Commission has endeavored to assess
the expected costs and benefits of the
proposed rulemaking in quantitative
terms, including PRA-related costs,
where possible. In situations where the
Commission is unable to quantify the
costs and benefits, the Commission
identifies and considers the costs and
benefits of the applicable proposed rules
in qualitative terms. The lack of data
and information to estimate those costs
is attributable in part to the nature of the
proposed rules. Additionally, the initial
and recurring compliance costs for any
particular DCO will depend on the size,
existing infrastructure, level of clearing
activity, practices, and cost structure of
the DCO.
The Commission notes that this
consideration is based on its
understanding that centralized clearing
activity functions internationally with
(i) clearing activity that involves U.S.
firms occurring across different
international jurisdictions; (ii) some
entities organized outside the U.S. that
are prospective or current Commission
registrants; and (iii) some entities
typically operating both within and
outside of the U.S. who follow
substantially similar business practices
wherever located. Where the
Commission does not specifically refer
to matters of location, its discussion of
costs and benefits refers to the effects of
the proposed rules on all activity subject
to it, whether by virtue of the activity’s
physical location in the United States or
by virtue of the activity’s connection
with or effect on U.S. commerce under
section 2(i) of the CEA. In particular, the
Commission notes that some DCOs
82 7
U.S.C. 19(a).
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subject to the proposed rules are located
outside of the United States.
The Commission generally requests
comment on all aspects of its costbenefit considerations, including the
identification and assessment of any
costs and benefits not discussed herein;
the potential costs and benefits of the
alternatives discussed herein; data and
any other information to assist or
otherwise inform the Commission’s
ability to quantify or qualitatively
describe the costs and benefits of the
proposed rules; and substantiating data,
statistics, and any other information to
support positions posited by
commenters with respect to the
Commission’s discussion. The
Commission welcomes comment on
such costs, particularly from existing
DCOs that can provide quantitative cost
data based on their respective
experiences. Commenters may also
suggest other alternatives to the
proposed approach.
2. Baseline
The baseline for the Commission’s
consideration of the costs and benefits
of this proposed rulemaking are: (1) The
DCO Core Principles set forth in section
5b(c)(2) of the CEA; (2) the general
provisions applicable to DCOs under
subparts A and B of part 39 of the
Commission’s regulations; (3) the
Commission’s regulations in subpart C
of part 39, which establish additional
standards for compliance with the core
principles for those DCOs that are
designated as SIDCOs or have elected to
opt-in to the subpart C requirements in
order to achieve status as a QCCP; (4)
Form DCO in appendix A to part 39; (5)
subpart C Election Form in appendix B
to part 39; and (6) §§ 1.20(d) and 140.94.
The Commission notes that some of
the proposed rules would codify
existing no-action relief and other
guidance issued by Commission staff.
To the extent that market participants
have relied upon such relief or staff
guidance, the actual costs and benefits
of the proposed rules, as discussed in
this section of the proposal, may not be
as significant.
3. Written Acknowledgment From
Depositories—§ 1.20
a. Benefits
Regulation 1.20(d)(1) requires an FCM
to obtain a written acknowledgment
from each depository with which the
FCM deposits futures customer funds.
The regulation provides that an FCM is
not required to obtain a written
acknowledgment from a DCO that has
adopted rules providing for the
segregation of customer funds, but other
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provisions of § 1.20(d) seem to suggest
that a DCO must provide the written
acknowledgment regardless. The
Commission is proposing to amend
§ 1.20(d) to clarify the Commission’s
intent that the requirements listed in
§ 1.20(d)(3) through (6) do not apply to
a DCO, or to an FCM that clears through
that DCO, if the DCO has adopted rules
that provide for the segregation of
customer funds. The Commission
believes this will benefit FCMs and
DCOs by reducing uncertainty as to
when an FCM must obtain a written
acknowledgment from a DCO.
b. Costs
The Commission does not believe the
proposed amendment would impose
any additional costs on DCOs or FCMs,
as it is clarifying the circumstances
under which an acknowledgment letter
would not be required.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(B) of the CEA, the
Commission believes that the proposed
amendments to § 1.20(d) would not
negatively impact the protection of
market participants and the public,
including DCOs’ clearing members and
their customers, as the proposed
amendment merely clarifies the
instances in which a DCO, or an FCM
that clears through that DCO, would not
need to file an acknowledgment letter
because the DCO has adopted rules that
provide for the segregation of customer
funds. The Commission believes that
the proposed amendment to § 1.20(d)
will result in an incremental increase in
efficiency for FCMs that follows from
reducing any previous uncertainty
regarding when they must obtain an
acknowledgement letter. The
Commission has considered the other
section 15(a) factors and believes that
they are not implicated by the proposed
amendment.
4. Definitions—§ 39.2
Regulation 39.2 sets forth definitions
applicable to terms used in part 39 of
the Commission’s regulations. The
Commission is proposing amendments
to the definition of ‘‘business day,’’
‘‘customer,’’ ‘‘customer account or
customer origin,’’ and ‘‘key personnel’’
in § 39.2 to maintain consistency with
terms defined elsewhere in Commission
regulations and to provide clarity with
respect to the use of these terms. The
Commission is also adding new
definitions for ‘‘enterprise risk
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management’’ and ‘‘fully-collateralized
position’’ to correspond with
amendments that the Commission is
proposing elsewhere in part 39.
a. Benefits
The Commission believes the
proposed amendments to § 39.2 would
benefit DCOs by clarifying existing part
39 requirements, such as what
constitutes a Federal holiday for
purposes of applying the definition of
‘‘business day.’’ The Commission
believes the newly proposed definitions
in § 39.2 for ‘‘enterprise risk
management’’ and ‘‘fully-collateralized
positions’’ are necessary to
understanding the proposed rules for an
enterprise risk management framework
in proposed § 39.10(d) and proposed
exceptions from several requirements
for fully-collateralized positions
throughout part 39. The proposed
amendments to the definitions of
‘‘customer’’ and ‘‘customer account or
customer origin’’ would also help to
avoid conflicts with similar terms
defined in § 1.3.
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b. Costs
The Commission does not believe the
proposed new and amended definitions
would impose additional costs on
DCOs, as they are not imposing
additional requirements, but rather
defining terms that are used in other
provisions.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission evaluated the costs and
benefits in light of the specific
considerations identified in section
15(a) of the CEA. The Commission
believes that DCOs may experience a
modest increase in efficiency as a result
of the proposed amendments. In
consideration of section 15(a)(2)(B) of
the CEA, the Commission believes that,
to the extent that the amended
definitions provide clarity, reduce any
previous uncertainty, or help to avoid
conflicts with similar terms that are
defined in different sections, these
effects, individually and in aggregate,
may yield increased efficiency. For
example, the Commission believes the
proposed amendments to the definition
of ‘‘business day’’ in § 39.2 will better
enable DCOs, particularly those located
outside of the United States, to easily
identify Federal holidays as it relates to
their compliance with applicable
reporting requirements under part 39.
The proposed amendments to § 39.2
would also provide foreign DCOs with
greater clarity by excluding ‘‘foreign
holidays’’ from the definition of
‘‘business day,’’ thereby eliminating the
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requirement to report to the
Commission on a non-trading day. After
considering the other section 15(a)
factors, the Commission believes they
are not implicated by the proposed
amendments.
5. Procedures for Registration—§ 39.3
and Form DCO
The Commission is proposing several
changes to its procedures for DCO
registration, including: The manner by
which a DCO applicant would file
supplemental information in proposed
§ 39.3(a)(3); procedures in proposed
§ 39.3(a)(4) to amend a pending
application; the potential for an
extension of the application review
period in proposed § 39.3(a)(6); and the
procedures for filing a request for an
amended order of registration in
proposed § 39.3(d). The Commission is
also proposing to codify the statutory
requirements in section 7 of the CEA to
vacate an order of registration as well as
specify the types of information that a
DCO must provide to the Commission in
this regard in proposed § 39.3(f); and
clarify the types of information that a
DCO must provide to request a transfer
of open interest in proposed § 39.3(g). In
addition, the Commission is proposing
to revise Form DCO to correspond with
proposed amendments to part 39 and to
reflect Commission staff’s experience
with DCO applications.
a. Benefits
The Commission believes the
proposed amendments to the DCO
registration procedures in § 39.3 and
Form DCO will make the procedures
more transparent to applicants. This
should allow prospective DCO
applicants to more efficiently prepare
complete applications, which should
reduce the need for Commission staff to
request additional information after
receiving the application and therefore
reduce the overall time needed to
review an application. For example, the
Commission is modifying Form DCO to
clarify the types of information that are
required and align the exhibits with the
amendments proposed under part 39.
These proposed amendments may
reduce an applicant’s time and
resources used in responding to staff
inquiries during the application review
process, as DCO applicants would be
better able to provide more complete,
accurate, and nuanced application
materials. The proposed amendments to
§ 39.3 would also adapt certain language
to better reflect terminology applicable
to DCOs in proposed § 39.3(a)(1) and (2)
and (b), which could help to avoid
confusion for potential DCO applicants
and existing DCOs. Furthermore, the
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Commission is proposing to codify its
long-standing procedures for staying an
application in proposed § 39.3(a)(6) to
provide DCO applicants with greater
transparency of the registration process.
The Commission is proposing to
amend § 39.3(a)(2) and Form DCO to
eliminate the required use of Form DCO
to request an amended order of
registration from the Commission. This
change would better reflect current
practice, where a DCO is permitted to
file a request for an amended order with
the Commission rather than submitting
Form DCO. Similarly, the Commission
is proposing to specify in proposed
§ 39.3(f) the types of information that
the Commission currently requests to
determine whether to vacate an order of
registration, which would provide DCOs
with more transparency as to the types
of information that are required as part
of a request to vacate an order of
registration. The proposed
recordkeeping requirements in
§ 39.3(f)(1)(iii) and (iv), which would
require a vacated DCO to continue to
maintain the books and records that it
would otherwise be required to
maintain as a registered DCO, would
provide the benefit of ensuring that a
DCO does not vacate its registration and
destroy its books and records in order to
hinder or avoid Commission action.
The Commission also proposes to
streamline the procedures for requesting
a transfer of open interest by separating
those procedures in existing § 39.3(g)
from the procedures to notify the
Commission of a DCO corporate
structure or ownership change. Under
the proposed amendments to § 39.3(g), a
DCO seeking to transfer its open interest
would be required to submit rules for
Commission approval pursuant to
§ 40.5, rather than submitting a request
for an order at least three months prior
to the anticipated transfer. This would
simplify the existing requirements and
permit the transfer to take effect after a
45-day Commission review period. The
Commission believes the 45-day period
would ensure that clearing members are
made aware of the intended transfer and
allow the Commission to determine
whether the transferee DCO is suitable
to accept the transfer.
b. Costs
The Commission believes DCOs
would not incur any additional costs
associated with the proposed
procedures to request an amended order
of registration in § 39.3(d), as a DCO
would incur the same costs if requesting
to amend its order of registration by
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using the current Form DCO.83 As to the
procedures to vacate a DCO’s
registration in proposed § 39.3(f), the
Commission believes the costs would
not be substantial. Any costs incurred
by DCOs would more likely be due to
the proposed recordkeeping
requirements in § 39.3(f)(1)(iii) and (iv),
which would require a vacated DCO to
continue to maintain the books and
records that it would otherwise be
required to maintain as a registered DCO
pursuant to § 1.31(b).
Finally, the Commission is proposing
to amend § 39.3(g) to permit a DCO
seeking to transfer its open interest to
submit rules for Commission approval
pursuant to § 40.5, rather than
submitting a request for an order at least
three months prior to the anticipated
transfer. The Commission does not
anticipate that DCOs would incur any
additional costs as a result of these
procedural changes beyond the costs to
prepare a § 40.5 rule submission, which
are likely to be similar to the costs of
requesting an order approving the
transfer. Additionally, the information
requested in proposed § 39.3(g) reflects
information that DCOs are already
required to provide in order to transfer
their open interest. The Commission
does not believe DCOs would incur
additional costs from any of the other
proposed amendments to the DCO
registration procedures in § 39.3.
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c. Section 15(a) Factors
In addition to the discussion above,
the Commission evaluated the costs and
benefits in light of the specific
considerations identified in section
15(a) of the CEA. The Commission
believes that the proposed changes to
the registration procedures will
maintain the protection of market
participants and the public by ensuring
that DCOs are in compliance with the
DCO Core Principles and Commission
regulations. The proposed changes
would also increase efficiency by
making the registration process more
transparent. This would enable DCOs
and DCO applicants to provide more
complete documentation in a more
concise manner, thereby reducing the
time and resources needed to comply
with such procedures. To the extent that
the proposed changes to the registration
procedures act to streamline the
application process, as well as to
establish the process for vacating a
DCO’s registration, the net result of
those changes would be a more efficient
83 The Commission estimates for PRA purposes
that there would be a reduction in the burden
incurred by DCOs, as discussed in section IX.B.1
above.
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process for registering as a DCO and for
vacating that registration.
Additionally, the Commission
believes that the proposed amendments
to § 39.3(g), which addresses a request
to transfer a DCO’s open interest, will
result in increased efficiency because
the proposed amendments streamline
and improve the existing process, as
DCOs would be able to use the existing
process under § 40.5, with which DCOs
are already familiar and which requires
a shorter review period. As a result,
DCOs may obtain approval to transfer
their open interest in a timelier manner,
which may benefit their operational and
business needs. To that end, the
Commission believes that these changes
will have a beneficial effect on the risk
management practices of DCOs,
inasmuch as the proposed changes may
modestly reduce the risks that may
accompany the transfer of open interest
to another DCO. Moreover, the proposed
recordkeeping requirements for vacated
DCOs will protect market participants
and the public by ensuring that a DCO
does not vacate its registration and
destroy its books and records in order to
hinder or avoid Commission action. The
Commission has considered the other
section 15(a) factors and believes that
they are not implicated by the proposed
amendments.
6. DCO Chief Compliance Officer—
§ 39.10(c)
a. Benefits
The Commission is proposing to
amend § 39.10(c) to allow a DCO to have
its CCO report to the senior officer
responsible for the DCO’s clearing
activities. This would provide DCOs
with flexibility to structure the
management and oversight of the CCO
based on the DCO’s particular corporate
structure, size, and complexity. This
may increase efficiency, reduce costs,
and improve the quality of the oversight
of the CCO, as the senior officer
overseeing the DCO’s clearing activities
would be better positioned to provide
day-to-day oversight of the CCO.
The Commission is proposing to
amend certain requirements in
§ 39.10(c) relating to the CCO annual
report to permit DCOs to incorporate by
reference, for up to five years, any
descriptions of written policies and
procedures that have not materially
changed since they were described
within the most recent CCO annual
report. The ability to incorporate by
reference the description of written
policies and procedures in the CCO
annual report could reduce the time and
costs needed to prepare the CCO annual
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report.84 The Commission is also
proposing to remove the requirement
that the DCO submit the CCO annual
report at the same time as the DCO’s
fiscal year-end audited financial
statement. This is consistent with the
proposed change to § 39.19(c)(3)(iv),
which would allow DCOs the flexibility
to submit required annual reports and
audited year-end financial statements
when ready but not later than 90 days
after the end of the DCO’s fiscal year.
The proposed changes recognize that
the DCO’s year-end audited financial
statements are prepared separately from
the CCO annual report and therefore
would not need to be prepared and
submitted together.
b. Costs
The Commission is proposing to
amend § 39.10(c) to require that a DCO
identify its compliance policies and
procedures by name, rule number, or
other identifier; describe the process by
which the annual report was submitted
to the board of directors or senior
officer; and allow incorporation by
reference in limited circumstances. The
Commission notes that a number of
DCOs already provide this information.
Therefore, the Commission expects that
the proposed changes to § 39.10(c)
would not impose additional costs on
those DCOs.85
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) of the CEA, the
Commission believes that certain of the
proposed changes to § 39.10(c) will
enhance the protection of market
participants and the public.
Specifically, the proposed changes to a
CCO’s reporting lines, along with the
added clarity regarding proper
identification of the compliance policies
and procedures in the CCO annual
report, is anticipated to enhance the
compliance function at DCOs, which
may have the corresponding effect of
improving the protections for market
participants and the public.
Additionally, in consideration of section
15(a)(2)(B) of the CEA, the proposed
amendment to permit incorporation by
reference in the CCO annual report will
84 The Commission estimates for PRA purposes
that there would be a reduction in the burden
incurred by DCOs, as discussed in section IX.B.2.a
above.
85 The Commission estimates for PRA purposes
that there would be a reduction in the burden
incurred by DCOs, as discussed in section IX.B.2.a
above.
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increase efficiency in preparing that
report. The Commission has considered
the other section 15(a) factors and
believes that they are not implicated by
the proposed amendments.
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7. Enterprise Risk Management—
§ 39.10(d)
a. Benefits
The Commission is proposing
§ 39.10(d) to require a DCO to have a
program of enterprise risk management
that identifies and assesses sources of
risk and their potential impact on the
operations and services of the DCO and
identify an enterprise risk officer. The
Commission believes that requiring
DCOs to establish and maintain an
enterprise risk management program in
proposed § 39.10(d) may encourage
DCOs to strengthen their existing
programs, especially if a DCO lacks an
enterprise risk management program
that is commensurate with industry best
practices. This may benefit the
resiliency of individual DCOs’
operations by requiring DCOs to
proactively identify potential risks on
an enterprise-wide basis beyond those
that a DCO might otherwise identify
pursuant to its compliance with specific
requirements in part 39. Compliance
with proposed § 39.10(d) by DCOs who
are affiliated with other registered
entities such as DCMs, SEFs, and SDRs
could also benefit the financial markets
more broadly, as risks identified and
addressed by the DCO may also apply
to their affiliates within the derivatives
markets.
Consistent with § 39.10(b), the
Commission does not intend to be
overly prescriptive by requiring specific
standards and methodologies. Proposed
§ 39.10(d)(3) would require a DCO to
follow generally accepted standards and
industry best practices with respect to
the development and ongoing
monitoring of its enterprise risk
management framework, assessment of
the performance of the enterprise risk
management program, and the
management and mitigation of risk to
the DCO. The Commission is mindful
that best practices evolve and change
over time and does not, therefore, wish
to prescribe specific standards in its
regulations. This flexibility would allow
DCOs to continue to develop enterprise
risk management programs in a manner
best suited for their specific risk
exposures, product types, customer
bases, market segments, and
organizational structures, among other
things, as long as their programs meet
the proposed minimum standards and
any other legal and regulatory
requirements.
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b. Costs
The Commission has found that DCOs
that proactively identify and manage
foreseeable risks have generally
implemented enterprise risk
management frameworks, in whole or in
part, to identify, assesses, and manage
sources of risk in a manner similar to
the requirements proposed in
§ 39.10(d)(1)–(4). Therefore, the
Commission believes that any
additional costs associated with these
requirements should be minimal
relative to existing industry practice for
those DCOs whose enterprise risk
management programs are
commensurate with industry best
practices. Additionally, as DCOs would
be able to comply with this requirement
by including the DCO in the enterprise
risk management program administered
by the DCO’s parent company or
affiliate, the Commission believes any
additional costs to comply with
proposed § 39.10(d) could be reduced if
the DCO is able to share the costs of
compliance with its parent or affiliates.
DCOs that do not have an enterprise risk
management program in line with
proposed § 39.10(d) or could not
otherwise rely on its parent’s or
affiliate’s enterprise risk management
program would incur costs to
implement such a program.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(D) of the CEA, the
Commission believes that the proposal
to require a DCO to have a formal
enterprise risk management program
will improve DCO risk management
practices by ensuring that DCOs have a
process for identifying and assessing
potential risks to the DCO on an
enterprise-wide basis, thereby
enhancing protection of market
participants and the public and the
financial integrity of the derivatives
markets. The Commission has
considered the other section 15(a)
factors and believes that they are not
implicated by the proposed
amendments.
8. Financial Resources—§ 39.11
a. Benefits
The Commission is proposing certain
changes to § 39.11, including: Clarifying
how a DCO’s largest financial exposure
should be calculated in proposed
§ 39.11(c)(2); requiring a DCO to use the
same stress test scenario to combine the
customer and house stress test losses of
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each clearing member in proposed
§ 39.11(c)(2)(ii); and requiring a DCO to
adopt rules to specifically permit the
netting of any gains in the house
account with customer losses in the
event of a member default (and
prohibiting a DCO from netting losses in
the house account with gains in the
customer account consistent with
section 4d of the CEA, which requires
the segregation of customer funds) in
proposed § 39.11(c)(2)(iii).
The Commission believes these
proposed adjustments to the
methodology used to calculate a DCO’s
financial resources requirement in
§ 39.11(c) would focus a DCO’s analysis
on the resources that would actually be
available to it during times of stress.
This approach is consistent with recent
guidance issued by CPMI–IOSCO
suggesting that, when assessing the
adequacy of their financial resources,
CCPs should take into account only
prefunded financial resources and
ignore voluntary excess contributions.
CCPs that wish to be considered QCCPs
are expected to follow this guidance, so
having Commission requirements that
are consistent with the guidance would
benefit DCOs.
Regulation 39.11(d)(2) sets out certain
conditions that apply to a DCO’s use of
assessments for additional guaranty
fund contributions in calculating the
financial resources available to meet its
obligations under § 39.11(a)(1).
Regulation 39.11(d)(2)(iv) provides that
a DCO shall only count the value of
assessments, after a 30 percent haircut,
‘‘to meet up to 20 percent of those
obligations.’’ The Commission proposes
to amend § 39.11(d)(2) to replace the
phrase ‘‘those obligations’’ with ‘‘the
total amount required under paragraph
(a)(1) of this section,’’ to provide DCOs
with more clarity as to how to comply
with this requirement.
Furthermore, the Commission is
proposing amendments to
§ 39.11(e)(1)(iii) and (e)(3) to clarify that
a DCO may use a committed line of
credit or similar facility, in whole or in
part, to satisfy § 39.11(e)(1)(ii) or (e)(2),
as long as the committed line of credit
or similar facility is not counted twice
to meet the requirements of
§ 39.11(e)(1)(ii) and (e)(2). This is a
clarification of the existing requirement,
which provides a DCO with additional
flexibility to optimize the liquidity
resources it holds, which would
potentially reduce certain opportunity
costs associated with holding more
expensive types of liquid resources,
such as cash.
Regulation 39.11(f)(1)(ii) requires a
DCO to file with the Commission a
financial statement of the DCO or of its
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parent company. The Commission is
proposing to amend § 39.11(f)(1)(ii) to
require that the financial statement
provided be that of the DCO and not the
parent company in order to better and
more accurately assess the financial
strength of the DCO. The Commission
believes it would also benefit the DCO
to be able to assess its compliance with
Core Principle B and § 39.11 and its
financial health separately from that of
its parent.
The Commission is proposing to
amend the periodic financial reporting
requirements in § 39.11(f)(1)(ii) and
(f)(2)(i) to permit quarterly and annual
financial statements to be prepared in
accordance with U.S. GAAP for DCOs
incorporated or organized under U.S.
law and in accordance with either U.S.
GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign
country. Although Commission
regulations generally require financial
statements to be prepared in accordance
with U.S. GAAP, the Commission has
permitted the use of IFRS by non-U.S.
DCOs as a condition of each DCO’s
registration order. The proposed rule
would retain this flexibility for non-U.S.
DCOs and provide greater transparency
to DCOs and DCO applicants of the
financial reporting requirements.
In reviewing DCOs’ financial
statements, Commission staff has noted
that the DCO’s own capital allocated to
meet the requirements of § 39.11(a)(1) or
(2) often are not identified accordingly.
The Commission therefore is proposing
in § 39.11(f)(1)(ii) and (f)(2)(i) to require
that assets allocated by the DCO for
such purpose must be clearly identified
on the DCO’s balance sheet as held for
that purpose. As a result, DCOs would
have the opportunity to more clearly
demonstrate that they have satisfied the
requirements of § 39.11(a)(1) or (2) and,
in doing so, may avoid unnecessary
follow-up questions from Commission
staff.
The Commission also is proposing to
require in § 39.11(f)(2) that, in addition
to its audited year-end financial
statement, a DCO would be required to
submit: (1) A reconciliation, including
appropriate explanations, of its balance
sheet when material differences exist
between it and the balance sheet in the
DCO’s financial statement for the last
quarter of the fiscal year or, if no
material differences exist, a statement so
indicating, and (2) such further
information as may be necessary to
make the statements not misleading.
Without such an explanation,
Commission staff may be under the
impression that the representations are
false or incorrect. This requirement
gives DCOs the opportunity to correct
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any discrepancies and avoid
unnecessary follow-up questions from
Commission staff.
Regulation 39.11(f)(3) requires a DCO
to provide to the Commission
documentation of the DCO’s financial
resources methodology and basis for
valuation and liquidity determinations
as part of its quarterly financial
reporting. The Commission is proposing
to revise § 39.11(f)(3) to provide that a
DCO must send this documentation to
the Commission only upon the DCO’s
first submission under § 39.11(f)(1) and
in the event of any change thereafter.
Not requiring this documentation to be
provided each quarter could reduce a
DCO’s reporting costs.86
The Commission is proposing to
amend § 39.11(f)(4) to require that DCOs
provide a certification as to the accuracy
and completeness of the DCO’s
quarterly financial report filed pursuant
to proposed § 39.11(f)(1), annual report
filed pursuant to proposed § 39.11(f)(2),
and any other reports filed pursuant to
proposed § 39.11(f)(3). The Commission
believes a certification requirement will
provide greater transparency with
regard to the submission process and
may increase the level of accountability
at the DCO, which may lead to greater
accuracy in reporting.
b. Costs
DCOs could incur initial costs to
recalibrate the method by which they
compute their financial resources to
comply with proposed § 39.11(c). If a
DCO does not have financial resources
sufficient to comply with § 39.11(a)(1)
based on its computation pursuant to
proposed § 39.11(c), the DCO would
have to procure additional financial
resources. Because DCOs vary in terms
of their size and level of clearing
activity, the Commission believes they
are better positioned to provide cost
estimates in this regard.
DCOs may incur costs to prepare their
own financial statements (as opposed to
financial statements of the parent
company) in accordance with proposed
§ 39.11(f)(1)(ii). For DCOs that already
prepare their own financial statements,
incremental costs will not be as large as
suggested by the regulatory baseline.
DCOs may incur minimal costs in
identifying in their balance sheet assets
allocated to meet the requirements of
§ 39.11(a)(1) or (2). DCOs may also incur
minimal costs to prepare a
reconciliation of their balance sheet
when material differences exist as
86 The Commission estimates for PRA purposes
that there would be a reduction in the burden
incurred by DCOs, as discussed in section
IX.B.2.c.ii above.
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compared to the DCO’s financial
statement for the last quarter of the
fiscal year.
The Commission believes DCOs may
incur additional costs associated with
complying with the proposed
certification requirements in
§ 39.11(f)(4). These costs may be
reduced for DCOs that already provide
them. The Commission recognizes that
a DCO may have to develop a process
in certifying its financial reports;
however, the Commission believes that
these costs may be reduced for DCOs to
the extent that they already have this
process in place.87
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) of the CEA, the
Commission believes that the proposed
amendments to § 39.11 will result in
improved protections for market
participants and the public.
Specifically, the proposed adjustments
to the methodology used to calculate a
DCO’s financial resources requirement
in § 39.11(c) and the corresponding
improvements to a DCO’s stress testing
results are expected to enhance the
safety and soundness of DCOs and their
ability to manage their risks, thereby
better protecting DCOs’ clearing
members and their customers, market
participants, and the public.
Additionally, in further consideration of
section 15(a)(2)(A) of the CEA, the
proposal to require in § 39.11(f)(1)(ii)
the financial statement of the DCO and
not that of its parent company, is
expected to better and more accurately
assess the financial strength of the DCO,
which will ultimately serve to protect
market participants and the public and
further the financial integrity of
derivatives markets. In consideration of
section 15(a)(2)(B) of the CEA, the
Commission believes that, to the extent
that the proposed amendments to
§ 39.11 will result in increased clarity or
transparency, as explained above, those
changes are anticipated to result in an
incremental increase in efficiency. In
consideration of section 15(a)(2)(D) of
the CEA, the Commission believes the
proposed adjustments to the
methodology used to calculate a DCO’s
financial resources requirement in
§ 39.11(c) would focus a DCO’s analysis
on the resources that would actually be
available to it during times of stress,
thereby improving the DCO’s risk
87 See
17 CFR 228, 229, 232, 240, 249, 270 and
274.
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management practices. The Commission
has considered the other section 15(a)
factors and believes that they are not
implicated by the proposed
amendments.
9. Participant and Product Eligibility—
§ 39.12
Regulation 39.12(b)(2) provides that a
DCO shall adopt rules providing that all
swaps with the same terms and
conditions are economically equivalent
within the DCO. As it was not the
intention of the Commission to require
DCOs that do not clear swaps to adopt
the rules required under this provision,
the Commission is proposing to revise
§ 39.12(b)(2) so that it explicitly applies
only to DCOs that clear swaps. This
could reduce rulebook drafting costs for
future DCO applicants that do not
intend to accept swaps for clearing. The
Commission believes the proposed
amendments to § 39.12 would not
impose costs on DCOs or swaps market
participants, as they would not be
clearing swaps through a DCO that does
not accept swaps for clearing. The
Commission has considered the section
15(a) factors and believes that they are
not implicated by these proposed
amendments.
10. Risk Management—§ 39.13
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a. Benefits
Regulation 39.13(g)(2)(i) requires that
a DCO have initial margin requirements
that are commensurate with the risks of
each product and portfolio, including
any unusual characteristics of, or risks
associated with, particular products or
portfolios. The regulation currently
notes that such risks include but are not
limited to jump-to-default risk or similar
jump risk. The Commission is proposing
to amend § 39.13(g)(2)(i) to note that
such risks also include ‘‘concentration
of positions.’’ Recent events, including
a significant loss from a default at a
central counterparty outside of the
Commission’s jurisdiction, highlight the
importance of addressing those risks.
This change would serve to benefit
DCOs and their clearing members by
making the rule more explicit.
Regulation 39.13(g)(3) requires a DCO
to have its systems for initial margin
requirements reviewed and validated by
a qualified and independent party on a
regular basis. The Commission is
proposing to specify that ‘‘on a regular
basis’’ means annually. Additionally,
§ 39.13(g)(3) provides that an employee
of the DCO may conduct such
independent validations as long as they
are not responsible for the development
or operation of the systems and models
being tested. Proposed § 39.13(g)(3)
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would expand the pool of eligible
employees to include employees of an
affiliate of the DCO, which would
provide DCOs with greater flexibility in
selecting appropriate staff to conduct
the validations.
Furthermore, the Commission is
proposing new § 39.13(g)(7)(iii) to
clarify that, in conducting back tests of
initial margin requirements, a DCO
should compare portfolio losses only to
those components of initial margin that
capture changes in market risk factors.
This proposal would ensure that back
testing of a DCO’s initial margin model
is more appropriately calibrated.
Regulation 39.13(g)(8)(i) requires a
DCO to collect initial margin on a gross
basis for each clearing member’s
customer account(s). Based on feedback
received from DCOs, the Commission
understands that there are significant
operational issues that may affect the
ability of clearing members to accurately
determine the positions of individual
customers on an intraday basis with
respect to certain types of transactions
(e.g., transfers, give-ups, and allocations
of block orders) and with respect to
certain types of market participants
(e.g., locals and high frequency traders).
Therefore, intraday gross margin
calculations may result in some clearing
members being charged too much
margin and others being charged too
little margin, which could necessitate
significant end-of-day adjustments.
Accordingly, the Commission proposes
to amend § 39.13(g)(8)(i) to permit a
DCO to collect customer initial margin
from its clearing members on a gross
basis only during its end-of-day
settlement cycle. Proposed
§ 39.13(g)(8)(i) is consistent with market
feedback and attempts to provide DCOs
with more flexibility in meeting the
requirements in light of the operational
issues that may arise intraday.
Regulation 39.13(g)(8)(ii) provides
that a DCO must require its clearing
members to collect customer initial
margin from their customers, ‘‘for nonhedge positions, at a level that is greater
than 100 percent of the [DCO]’s initial
margin requirements with respect to
each product and swap portfolio.’’
Consistent with interpretative guidance
issued by the Division, the Commission
is proposing to amend § 39.13(g)(8)(ii) to
permit DCOs to establish customer
initial margin requirements based on the
type of customer account and to apply
prudential standards that result in FCMs
collecting customer initial margin at
levels commensurate with the risk
presented by each customer account.
The proposed amendments to
§ 39.13(g)(8)(ii) would give DCOs
reasonable discretion in determining the
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percentage by which customer initial
margin requirements must exceed the
DCO’s clearing initial margin
requirements with respect to particular
products or portfolios. This approach
acknowledges that the existing standard
does not appropriately take into account
each DCO’s particular circumstances
and the nature of its clearing members
and their customers.
Regulation 39.13(h)(1)(i) requires a
DCO to impose risk limits on each
clearing member, by house origin and
by each customer origin, in order to
prevent a clearing member from
carrying positions for which the risk
exposure exceeds a specified threshold
relative to the clearing member’s and/or
the DCO’s financial resources. The
Commission is proposing to note that
such risk limits should also be imposed
to address positions that may be
difficult to liquidate. As noted above,
recent events highlight the importance
of imposing risk limits to address
positions that may be difficult to
liquidate, particularly concentrated
positions. The proposed change would
help to ensure that a DCO can properly
manage its risks in instances where, for
example, a position in a particular
contract or swap is concentrated with a
particular member, such that there is
reason to doubt whether, in the event
that this member defaults, other
members would be willing and able to
accept, collectively, the entirety of that
position or swap.
Regulation 39.13(h)(5)(ii) requires a
DCO to, on a periodic basis, review the
risk management policies, procedures,
and practices of each of its clearing
members, which address the risks that
such clearing members may pose to the
DCO, and to document such reviews.
The Commission is proposing to clarify
that DCOs should, having conducted
such reviews, take appropriate actions
to address concerns identified in such
reviews, and require that the
documentation of the reviews should
include the basis for determining what
action was appropriate to take. Absent
such follow-up, the reviews would lack
purpose. The proposed change would
help to ensure that DCOs are taking
steps to manage any risks posed by their
members, thereby enhancing the DCO’s
risk management functions.
b. Costs
The Commission is proposing to
amend § 39.13(g)(2)(i) to clarify that a
DCO shall have initial margin
requirements that are commensurate
with the risks of each product and
portfolio, including, but not limited to,
concentration of positions. The
Commission is merely clarifying that
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concentrated positions are one of the
risks that DCOs should be incorporating
in their initial margin requirements. The
Commission does not believe that DCOs,
or their clearing members, would incur
any additional costs with this
clarification.
In addition, § 39.13(g)(3) requires that
a DCO’s systems for generating initial
margin requirements, including its
theoretical models, be reviewed and
validated by a qualified and
independent party on a regular basis.
The provision further provides that
employees of the DCO may conduct the
validations as long as they are not
responsible for the development or
operation of the systems and models
being tested. The Commission is
proposing to amend § 39.13(g)(3) to
specify that ‘‘on a regular basis’’ means
annually and to also permit employees
of an affiliate of the DCO to conduct
such independent validations. The
Commission believes these amendments
would not impose additional costs on
DCOs insofar as DCOs were already
interpreting ‘‘regular’’ to mean annual,
but rather may reduce costs by
permitting the use of employees of a
DCO’s affiliate when conducting the
independent validations.
The Commission is proposing new
§ 39.13(g)(7)(iii) to specify that, in
conducting back tests of initial margin
requirements, a DCO shall compare
portfolio losses only to those
components of initial margin that
capture changes in market risk factors.
This change is intended to reflect
existing practices; therefore, any costs
associated with this change would be
reduced for DCOs that already follow
this approach.
Regulation 39.13(g)(8)(i) requires a
DCO to collect initial margin on a gross
basis for each clearing member’s
customer account(s). As noted above,
after the regulation was adopted,
Division staff learned of operational
issues that DCOs would face if the
provision applied to intraday
settlements as well as end-of-day
settlements. As a result, the Commission
proposes to amend § 39.13(g)(8)(i) to
permit a DCO to collect customer initial
margin from its clearing members on a
gross basis only during its end-of-day
settlement cycle. Because this change is
intended to reflect existing practice, any
costs associated with this change would
be reduced for those DCOs that already
follow this approach.
Regulation 39.13(g)(8)(i)(B) provides
that, for purposes of calculating the
gross initial margin requirement for
clearing members’ customer accounts, a
DCO may require its clearing members
to report to the DCO the gross positions
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of each individual customer or the sum
of the gross positions of its customers.
The Commission is proposing
amendments to § 39.13(g)(8)(i)(B) to
require a DCO to have rules requiring its
clearing members to report customer
information about futures (as well as
swaps) to DCOs. This will enable DCOs,
in turn, to report this information to the
Commission under § 39.19(c)(1)(i)(D),
which, as proposed, would require
DCOs to report the positions themselves
(i.e., the long and short positions) as
well as risk sensitivities and valuation
data for end-of-day positions. The
Commission believes adopting and
implementing such rules could impose
nominal cost on DCOs. In addition,
clearing members may incur costs
associated with reporting this data to
the extent they are not already doing so.
The Commission is proposing to
amend § 39.13(g)(12) by requiring DCOs
to increase the frequency by which they
evaluate the appropriateness of haircuts
that they apply to initial margin
collateral from a quarterly basis to a
monthly basis. Because § 39.11(d)(1)
already requires that haircuts be
evaluated on a monthly basis for assets
that are used to meet the DCO’s
financial resources obligations set forth
in § 39.11(a), and those resources
include initial margin, the Commission
does not believe this change will result
in any increase in costs.
In § 39.13(h)(1)(i), the Commission is
proposing to require that, in
determining a clearing member’s risk
limits under existing § 39.13(h)(1)(i), the
factors that a DCO considers must
include the difficulty of liquidating the
clearing member’s positions. The
Commission believes that this change
may impose minimal costs.
In § 39.13(h)(5)(ii), the Commission is
proposing to clarify that a DCO should
take appropriate actions to address
concerns identified in its review of the
risk management policies of its clearing
members. The Commission believes that
DCOs already do this as part of their
compliance with existing
§ 39.13(h)(5)(ii).
In § 39.13(i), the Commission is
proposing to require a DCO to provide
certain information as part of a rule
filing submitted for Commission
approval pursuant to § 40.5 to facilitate
the Commission’s review of a DCO’s
cross-margining program. This
information includes: Identification of
the products that would be eligible for
cross-margining; analysis of the risk
characteristics, the liquidity of the
respective markets, and availability of
reliable prices; financial and operational
requirements that would apply to
clearing members participating in the
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program; a description and analysis of
the margin methodology that would be
used to calculate initial margin
requirements; procedures the DCO
would follow in the event of a clearing
member default; a description of the
arrangements for obtaining daily
position data with respect to products in
the account; whether funds to support
the cross-margined positions will be
maintained together in one account or
in separate accounts at each
participating clearing organization; and
a copy of the agreement between the
clearing organizations participating in
the cross-margining program. A DCO
may incur costs to prepare and provide
this information.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) and (D) of the CEA,
the Commission believes that the
proposed amendments to § 39.13 will
aid in the protection of market
participants and the public by
enhancing certain risk management
requirements of DCOs. For example,
proposed § 39.13(g)(12) would require
DCOs to increase the frequency by
which they evaluate the appropriateness
of haircuts that they apply to initial
margin collateral. Given that initial
margin is held for risk management
purposes, assessing haircuts more
frequently would enhance a DCO’s
ability to manage its risks. In addition,
the proposed amendments to § 39.13
will help preserve the efficiency and
financial integrity of the derivatives
markets by enhancing certain risk
management requirements of DCOs. For
example, in consideration of section
15(a)(2)(B) of the CEA, the Commission
believes the proposed amendments to
§ 39.13(h)(1)(i), which would specify
that a DCO’s risk limits should address
positions that may be difficult to
liquidate, would help to ensure that a
DCO can properly manage its risks in
the event of a default, thereby
promoting the financial integrity of the
derivatives markets. The Commission
also believes that the amendments to
§ 39.13 will strengthen and promote
sound risk management practices across
DCOs, their clearing members, and
clearing members’ customers.
Specifically, the amendments enhance,
clarify, and provide flexibility in
complying with several DCO risk
management requirements, which will
aid DCOs in efficiently allocating their
risk management attention and
resources. Finally, in consideration of
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section 15(a)(2)(E) of the CEA, the
Commission notes the public interest in
promoting and protecting public
confidence in the safety and security of
the financial markets. DCOs are
essential to risk management in the
financial markets, both systemically and
on an individual firm level. The
proposed amendments, by enhancing,
clarifying, and providing flexibility
beyond current requirements, promote
the ability of DCOs to perform these risk
management functions. The
Commission has considered the other
section 15(a) factors and believes that
they are not implicated by the proposed
amendments.
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11. Treatment of Funds—§ 39.15
a. Benefits
The Commission is proposing to
amend § 39.15(b)(1) to clarify that
‘‘funds and assets’’ are equivalent to
‘‘money, securities, and property,’’
which would better align the language
of § 39.15(b)(1) with the language in the
CEA. Furthermore, § 39.15(b)(2)(ii)
requires a DCO to file a petition for an
order pursuant to section 4d(a) of the
CEA in order for the DCO and its
clearing members to commingle
customer positions in futures, options,
and swaps in a futures customer
account subject to section 4d(a) of the
CEA The Commission is proposing to
amend § 39.15(b)(2)(ii) to permit a DCO
to file rules for Commission approval
pursuant to § 40.5 in order for the DCO
and its clearing members to commingle
such positions. This would better align
the requirements of § 39.15(b)(2)(ii) with
§ 39.15(b)(2)(i), which requires a DCO
that wants to commingle futures,
options, and swaps in a cleared swaps
customer account to file rules for
Commission approval. This approach
would reduce the burden on DCOs
while providing the Commission with
sufficient means to determine whether
the customer funds will be adequately
protected.
Regulation 39.15(d) requires a DCO to
have rules providing for the prompt
transfer of all or a portion of a
customer’s portfolio of positions and
related funds at the same time from the
carrying clearing member to another
clearing member, without requiring the
close-out and re-booking of the
positions prior to the requested transfer.
Based on feedback received from DCOs,
the Commission is proposing to amend
§ 39.15(d) to delete the words ‘‘at the
same time,’’ thus requiring the
‘‘prompt,’’ but not necessarily
simultaneous, transfer of a customer’s
positions and related funds. The
Commission is further amending the
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provision to require the transfer of
related funds ‘‘as necessary,’’
recognizing that the transfer of customer
positions will not always require the
transfer of funds. These changes are
meant to reflect common practice and
provide greater flexibility to DCOs in
transferring positions and funds. The
Commission is also proposing to amend
§ 39.15(e), which relates to permitted
investments of customer funds, to
clarify that the regulation applies to any
investment of customer funds or assets,
including cleared swaps customer
collateral, as defined in § 22.1. At the
time § 39.15(e) was adopted, the
Commission had not yet adopted
regulations concerning cleared swaps
customer funds but intended for
§ 39.15(e) to also apply to those funds.
This change would ensure that cleared
swaps customer collateral receives the
same safekeeping as other funds and
assets invested by DCOs and would
reflect the Commission’s intent.
b. Costs
The Commission believes proposed
amendments to § 39.15(b)(2)(ii) to
permit a DCO to file rules for
Commission approval pursuant to § 40.5
in order for the DCO and its clearing
members to commingle certain customer
positions would streamline the
procedures for a request to commingle
customer funds and would not increase
costs to DCOs. As discussed above, the
proposal would potentially reduce costs
for DCOs that would otherwise have to
petition the Commission for an order
providing relief from section 4d of the
CEA in order to commingle such
customer funds. The Commission has
not identified any other costs associated
with the proposed amendments to
§ 39.15, including costs to customers in
this regard.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) of the CEA, the
Commission believes that the proposed
amendments to § 39.15 will aid in the
protection of market participants and
the public, specifically customers of
clearing members, by providing clarity
on several requirements related to the
treatment of customer funds, including
with respect to the transfer of customer
positions and funds under § 39.15(d).
Moreover, the proposed amendments
will promote efficiency in the
derivatives markets by streamlining the
procedures for a request to commingle
customer funds, as DCOs would be
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permitted to file rules for Commission
approval whether requesting to
commingle customer funds in a futures
or cleared swaps customer account. The
Commission has considered the other
section 15(a) factors and believes that
they are not implicated by the proposed
amendments.
12. Default Rules and Procedures—
§ 39.16
a. Benefits
The Commission is proposing to
amend § 39.16 to improve DCOs’ default
management processes by, among other
things: Requiring a DCO to include its
clearing members in an annual test of its
default management plan in proposed
§ 39.16(b); requiring the DCO to
establish a default committee, which
must include clearing members and
other participants, that would convene
in the event of a default involving
substantial or complex positions to help
identify any market issues that the DCO
is considering in proposed § 39.16(c)(1);
and requiring a DCO’s default
management procedures to include
immediately posting a declaration of a
default on the DCO’s website in
proposed § 39.16(c)(2)(ii). The proposed
amendments are intended to ensure that
clearing members are prepared in the
event of a default.
The Commission is also proposing to
amend § 39.16(c)(2)(iii)(C) to require any
allocation of a defaulting clearing
member’s positions to be proportional to
the size of the participating or accepting
clearing member’s positions in the same
product class at the DCO. This proposed
amendment would ensure that clearing
members have the flexibility, but not the
requirement, to participate in auctions
and allocations beyond the proportional
size of their respective positions as
measured by the initial margin
requirement for those positions. This
ensures that clearing members cannot be
forced to involuntarily absorb positions
of a defaulting member which
incentivizes the DCO to calibrate its risk
management mechanisms in a manner
to avoid a scenario in which clearing
members’ participation in an auction or
allocation falls short of the size of the
defaulting clearing member’s positions
in that product class.
b. Costs
To comply with the proposal to
require the participation of clearing
members in a test of a DCO’s default
management plan and in a DCO’s
default committee, a DCO may incur
costs to coordinate clearing members’
participation and to establish a default
committee. However, the Commission
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believes that many DCOs already
involve clearing members in their tests
as a matter of best practice. The
Commission is not aware of a less costly
alternative that would provide clearing
members with an opportunity to
participate in key aspects of a DCO’s
default management.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) of the CEA, the
Commission believes that the proposed
amendments to § 39.16(c)(2)(ii) to
require that a DCO have default
procedures that include immediate
public notice on the DCO’s website of a
declaration of default will aid in the
protection of market participants and
the public by ensuring more timely
notice of a default. In further
consideration of section 15(a)(2)(A) of
the CEA, the Commission believes the
proposed amendments to
§ 39.16(c)(2)(iii)(C) regarding the
allocation of a defaulting clearing
member’s positions would protect
clearing members from involuntarily
having to bid on or accept defaulting
positions that are not in proportion to
the size of their positions in that
product class, while also providing
clearing members with the flexibility to
voluntarily bid on or accept more than
a proportional share of the defaulting
positions if that clearing member has
the ability to manage the risk of those
new positions. In consideration of
section 15(a)(2)(B) and (D) of the CEA,
the Commission believes the additional
amendments to § 39.16(b) and (c)(1)
support the financial integrity of the
derivatives markets and promote sound
risk management practices by requiring
DCOs to have greater clearing member
participation in their default
management processes and procedures.
The Commission has considered the
other section 15(a) factors and believes
that they are not implicated by the
proposed amendments.
13. Rule Enforcement—§ 39.17
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a. Benefits
Regulation 39.17(a) codifies Core
Principle H, which requires a DCO to
maintain adequate arrangements and
resources for the effective monitoring
and enforcement of compliance with its
rules and dispute resolution. The
Commission is proposing a technical
change to § 39.17(a)(1) to emphasize that
a DCO is required to monitor and
enforce compliance by both itself and its
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members with the DCO’s rules. The
Commission is also proposing to amend
§ 39.17(b), which permits a DCO’s board
of directors to delegate its responsibility
for compliance with the requirements of
§ 39.17(a) to the DCO’s risk management
committee, to allow a DCO to delegate
such responsibility to a committee other
than the risk management committee.
This would allow DCOs more discretion
in delegating this function to the most
appropriate committee.
b. Costs
The Commission does not believe the
proposed amendments to § 39.17(a)(1)
or (b) will impose any additional costs
on DCOs or their members because the
changes are technical in nature.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(D) of the CEA, the
Commission believes that the proposed
amendments to § 39.17 will promote
sound risk management practices by
emphasizing the importance of
compliance with DCO rules and by
providing DCOs with additional
flexibility in structuring their
governance arrangements. The
Commission has considered the other
section 15(a) factors and believes that
they are not implicated by the proposed
amendments.
14. Reporting—§ 39.19
a. Benefits
The Commission is proposing several
amendments to § 39.19 to add new
requirements, clarify certain existing
requirements, and incorporate other
proposed amendments to part 39. The
proposed amendments to § 39.19 would
assist DCOs by codifying the bulk of
DCOs’ ongoing reporting requirements
in one section of part 39 and providing
additional detail with respect to certain
requirements. In some cases, the
Commission is proposing to adopt
additional reporting requirements that
would allow the Commission to conduct
more effective oversight of DCOs’
compliance with the DCO Core
Principles and Commission regulations.
As part of the daily reporting
requirements, the Commission is
proposing to amend § 39.19(c)(1)(i)(A)–
(C) to specify that a DCO is required to
report margin, cash flow, and position
information by individual customer
account. The Commission believes the
ability to analyze positions at the
customer level is a crucial element of an
effective risk surveillance program. The
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ability to identify those customers
whose positions create the most risk to
a DCO’s clearing members would assist
the Commission in determining whether
adequate measures are in place to
address those risks and whether the
Commission needs to take proactive
steps to see that those risks are
mitigated, thereby enhancing the
protections afforded to the markets
generally. The Commission is also
proposing to amend § 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day
position information, DCOs must report
the positions themselves (i.e., the long
and short positions) as well as risk
sensitivities and valuation data for these
positions.88 This information will better
inform staff of the assumptions
incorporated into the position
information. The Commission is also
proposing to amend § 39.19(c)(1)(i)(D) to
have DCOs provide any legal entity
identifiers and internally-generated
identifiers within each customer origin
for each clearing member, which would
help identify customers across clearing
members and DCOs.
The Commission is proposing to add
certain event-specific reporting
requirements, including: A decrease in
liquidity resources in proposed
§ 39.19(c)(4)(ii); a legal name change in
proposed § 39.19(c)(4)(xi); a change in
any liquidity funding arrangement in
proposed § 39.19(c)(4)(xiii); a change in
settlement bank arrangements in
proposed § 39.19(c)(4)(xiv); a change in
a DCO’s arrangements with its
depositories that hold customer funds in
proposed § 39.19(c)(4)(xvi); a change in
the DCO’s fiscal year end in proposed
§ 39.19(c)(4)(xx); a change in the DCO’s
accounting firm in proposed
§ 39.19(c)(4)(xxi); major decisions of the
DCO’s board in proposed
§ 39.19(c)(4)(xxii); issues with a DCO’s
margin model in proposed
§ 39.19(c)(4)(xxiv) or settlement bank in
proposed § 39.19(c)(4)(xv); and new
futures or option products accepted for
clearing by the DCO in proposed
§ 39.19(c)(4)(xxvi). The Commission
believes it is important for it to be aware
of these changes due to their potential
impact on a DCO’s operations.
b. Costs
The Commission expects a minimal
cost burden with respect to the
proposed changes to the event-specific
reporting requirements under
§ 39.19(c)(4), in part because the
incidents that would trigger such
88 The Commission estimates for PRA purposes
that there would be an increase in the burden
incurred by DCOs, as discussed in section IX.B.2.d
above.
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reporting do not occur very often.
Furthermore, where reporting is
required under § 39.19(c)(4), a DCO is
required to provide a brief notice with
only the pertinent details of the
incident. Therefore, the Commission
believes any costs imposed by these
changes would be nominal.
With respect to daily reporting
requirements, the Commission
understands that most DCOs already
report the information that would be
required. Because staff guidance
regarding the format and manner of this
reporting is periodically updated, the
Commission understands that there may
be costs associated with making
technical changes to accommodate these
updates. The Commission requests an
estimate of any such costs from DCOs
that currently report this information.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) and (D) of the CEA,
the Commission believes that the
proposed amendments to § 39.19 will
promote the protection of market
participants and the public and
contribute to sound risk management
practices by providing the Commission
with timely information that is critical
to its risk surveillance efforts. Also, in
consideration of section 15(a)(2)(D) of
the CEA, the Commission believes that
requiring DCOs to provide notice to the
Commission of certain additional events
under § 39.19, such as a decrease in
liquidity resources, settlement bank
issues, and margin model issues, could
further incentivize DCOs to avoid those
risks, or to mitigate them more
effectively if they do occur. The
Commission has considered the other
section 15(a) factors and believes that
they are not implicated by the proposed
amendments.
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15. Public Information—§ 39.21
a. Benefits
The Commission is proposing to
amend the public reporting
requirements of § 39.21 to require that
DCOs make each of the items of
information listed in proposed
§ 39.21(c) 89 available separately on the
89 Regulation 39.21(c) requires a DCO to disclose
publicly and to the Commission information
concerning: (1) The terms and conditions of each
contract, agreement, and transaction cleared and
settled by the DCO; (2) each clearing and other fee
that the DCO charges its clearing members; (3) the
margin-setting methodology; (4) the size and
composition of the financial resource package
available in the event of a clearing member default;
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DCO’s website instead of merely
including them in the DCO’s rulebook.
This would assist DCOs’ current and
prospective clearing members and the
general public in locating the relevant
information. Furthermore, § 39.21(c)(4)
requires a DCO to publicly disclose the
size and composition of its financial
resource package available in the event
of a clearing member default. To address
questions concerning how often this
information must be updated, the
Commission is proposing to amend
§ 39.21(c)(4) to clarify that it should be
updated quarterly, consistent with
§ 39.11(f)(1)(i)(A), which requires a DCO
to report this information to the
Commission each fiscal quarter. The
proposed change would assist DCOs in
complying with this requirement, while
ensuring consistent and timely
disclosure to the public.
b. Costs
Because the proposed amendments to
§ 39.21 merely require a DCO to
separately make public information that
would otherwise be made public in its
rulebook, the Commission anticipates
any additional costs to DCOs would be
minimal.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A), (B), and (D) of the
CEA, the Commission believes that the
proposed amendments to § 39.21 would
enhance existing protection of market
participants and the public; promote the
efficiency and financial integrity of the
derivatives markets; and aid in sound
risk management practices by ensuring
that key public information about the
DCO’s operations is readily accessible,
complete, and current. The Commission
has considered the other section 15(a)
factors and believes that they are not
implicated by the proposed
amendments.
16. Governance Fitness Standards,
Conflicts of Interest, and Composition of
Governing Boards—§§ 39.24, 39.25, and
39.26
arrangements for SIDCOs and subpart C
DCOs, and adopt new §§ 39.24, 39.25,
and 39.26, which would incorporate all
of the requirements of § 39.32. All
DCOs, including SIDCOs and subpart C
DCOs, would be subject to the same
governance fitness standards, conflict of
interest requirements, and board
composition requirements, which most
DCOs already meet in order to be
considered a QCCP. This would give
DCOs clear direction on how to comply
with Core Principles O, P, and Q,90 the
only DCO Core Principles for which the
Commission has yet to adopt
implementing regulations. Further,
consistent with Core Principle Q,
proposed § 39.26 would require that a
DCO’s governing board or committee
includes market participants. Because
the Commission has become aware of
issues in interpreting this requirement,
the Commission proposes to define
‘‘market participant,’’ as well as specify
that market participation is required on
the DCO’s governing board or governing
committee, i.e., the group with the
ultimate decision-making authority.
This would avoid ambiguity and
provide DCOs with greater clarity.
b. Costs
DCOs may incur costs to comply with
the proposed requirements in §§ 39.24,
39.25, and 39.26.91 Some DCOs must
already comply with these standards
and will not face incremental costs. The
language that is proposed to be adopted
in §§ 39.24, 39.25, and 39.26 is
essentially the same as that which is
included in § 39.32. Regulation 39.32 is
applicable to SIDCOs and subpart C
DCOs and implements guidance from
the PFMIs with which a CCP must
comply in order to be considered a
QCCP. Non-U.S. DCOs that are neither
SIDCOs nor subpart C DCOs are
generally held to these requirements by
their home country regulators for the
same reason. The Commission believes
these standards are appropriate for all
DCOs and incorporate best practices
within the clearing industry.
a. Benefits
The Commission is proposing to
remove § 39.32, which sets forth
requirements for governance
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. Although the
Commission believes that most, if not
all, DCOs already comply with these
(5) daily settlement prices, volume, and open
interest for each contract, agreement, or transaction
cleared or settled by the DCO; (6) the DCO’s rules
and procedures for defaults in accordance with
§ 39.16; and (7) any other matter that is relevant to
participation in the clearing and settlement
activities of the DCO.
90 Core Principles O, P, and Q respectively
address governance arrangements, conflicts of
interest, and composition of governing boards.
91 The Commission estimates for PRA purposes
that there would be an increase in the burden
incurred by DCOs, as discussed in section IX.B.2.g
above.
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requirements, to the extent they do not,
the Commission believes the adoption
of §§ 39.24, 39.25, and 39.26 would
improve DCO risk management
practices by promoting transparency of
governance arrangements and making
sure that the interests of a DCO’s
clearing members and, where relevant,
their customers are taken into account.
This would further enhance the
protection of market participants and
the public and the financial integrity of
the derivatives markets.
17. Legal Risk—§ 39.27
The Commission is proposing to
amend § 39.27(c) to require a DCO that
provides clearing services outside the
United States to ensure that the
memorandum required in Exhibit R of
Form DCO remains accurate and up-todate. This would ensure that the DCO
remains aware of any potential choice of
law issues that may impact the
enforceability of the DCO’s rules,
procedures, and contracts in all relevant
jurisdictions. The Commission believes
this requirement would not impose
additional costs on DCOs that already
maintain compliance with § 39.27(c), as
DCOs with prudent risk management
practices should continuously assess
their rules, procedures, and policies
against the laws and regulations of the
jurisdictions in which they operate. For
the same reason, the Commission does
not anticipate that this requirement will
have a direct impact on any of the
section 15(a) factors.
b. Costs
The Commission does not anticipate
any costs associated with these
amendments, as the proposed rules
remove requirements that need not
apply to fully-collateralized positions.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(B) of the CEA, the
Commission believes that the proposal
to codify relief that the Commission has
granted to DCOs that clear fullycollateralized positions from
requirements that do not apply to these
positions, may increase operational
efficiency for such DCOs. The proposed
amendments should not impact the
protection of market participants and
the public, the financial integrity of
markets, or sound risk management
practices, as the requirements that the
Commission is proposing to exclude for
fully-collateralized positions do not
further these factors when applied to
such positions. The Commission has
considered the other section 15(a)
factors and believes that they are not
implicated by the proposed
amendments.
a. Benefits
19. Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to
the Provisions—§§ 39.33, 39.36, 39.37,
and Subpart C Election Form
As discussed above, fullycollateralized positions do not expose
DCOs to many of the risks that
traditionally margined products do. Full
collateralization prevents a DCO from
being exposed to credit risk stemming
from the inability of a clearing member
or customer of a clearing member to
meet a margin call or a call for
additional capital. This limited
exposure and full collateralization of
that exposure renders certain provisions
of part 39 inapplicable or unnecessary.
As a result, the Division has granted
relief from certain provisions of part 39
to DCOs that clear fully-collateralized
positions. The Commission is proposing
to codify this relief in order to provide
greater clarity to DCOs and future
applicants for DCO registration
regarding how the regulations in part 39
apply to DCOs that clear fullycollateralized positions. DCOs that clear
fully-collateralized positions would no
longer need to request relief from
a. Benefits
Regulation 39.33(a)(1) requires a
SIDCO or a subpart C DCO that is
systemically important in multiple
jurisdictions, or that is involved in
activities with a more complex risk
profile, to maintain financial resources
sufficient to enable it to meet its
financial obligations to its clearing
members notwithstanding a default by
the two clearing members creating the
largest combined loss in extreme but
plausible market conditions. The
Commission is proposing to amend
§ 39.33(a)(1) by replacing the phrase
‘‘largest combined loss’’ with ‘‘largest
combined financial exposure’’ in order
to be consistent with Core Principle B
and § 39.11(a)(1) regarding DCO
financial resources requirements. The
Commission is also proposing to amend
§ 39.33(c)(1) to clarify that the ‘‘largest
aggregate liquidity obligation’’ means
the total amount of cash, in each
relevant currency, that the defaulted
18. Fully-Collateralized Positions—
§§ 39.2, 39.11, 39.12, 39.13, and 39.19
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certain part 39 requirements nor attempt
to comply with those requirements,
thereby conserving such DCOs’ time and
resources.
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clearing member would be required to
pay to the DCO. Proposed § 39.33(c)(1)
would reduce currency risk for SIDCOs
and subpart C DCOs by ensuring that
these DCOs have sufficient liquidity in
the relevant currency of corresponding
obligations during the time it would
take to liquidate or auction a defaulted
clearing member’s positions. The
Commission is also proposing to amend
§ 39.33(d) to require that a SIDCO use
available Federal Reserve Bank accounts
and services where practical. This
requirement would further enhance a
SIDCO’s financial integrity and
management of liquidity risk, thereby
promoting the financial integrity of the
derivatives markets, while permitting
SIDCOs to consider lower cost
alternatives where appropriate.
Furthermore, the Commission is
proposing to amend § 39.36(b)(2)(ii) to
replace the words ‘‘produce accurate
results’’ with ‘‘react appropriately’’ to
better reflect that the purpose of a
sensitivity analysis is to assess whether
the margin model will react
appropriately to changes of inputs,
parameters, and assumptions, thereby
enhancing the overall margin coverage.
The Commission is also proposing to
amend § 39.36(d), which requires each
SIDCO and subpart C DCO to
‘‘regularly’’ conduct an assessment of
the theoretical and empirical properties
of its margin model for all products it
clears, to clarify that the assessment
should be conducted on at least an
annual basis or more frequently if there
are material relevant market
developments. This would ensure that
SIDCOs and subpart C DCOs continue to
test their margin model with sufficient
frequency.
Under § 39.37, a SIDCO or a subpart
C DCO is required to publicly disclose
its responses to the CPMI–IOSCO
Disclosure Framework 92 and, in order
to ensure the continued accuracy and
usefulness of its responses, to review
and update them at least every two
years and following material changes to
the SIDCO’s or subpart C DCO’s system
or environment in which it operates.
The Commission is proposing to amend
§ 39.37(b) to additionally require that a
SIDCO or a subpart C DCO notify the
Commission no later than ten business
days after any updates to its responses
to the CPMI–IOSCO Disclosure
Framework to reflect material changes
to the DCO’s system or environment.
The notice would need to identify
changes made since the latest version of
92 See CMPI–IOSCO, Principles for Financial
Market Infrastructures: Disclosure Framework and
Assessment Methodology (Dec. 2012), available at
https://www.iosco.org/library/pubdocs/pdf/
IOSCOPD396.pdf.
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the responses. The Commission is also
proposing to amend § 39.37(c) to
explicitly state that a SIDCO or a
subpart C DCO must disclose relevant
basic data on transaction volume and
values that are consistent with the
standards set forth in the CPMI–IOSCO
Public Quantitative Disclosure
Standards for Central Counterparties.
These proposed amendments would be
consistent with SIDCOs’ and subpart C
DCOs’ existing CPMI–IOSCO
obligations.
The Commission is proposing to
amend the subpart C Election Form to
better reflect the requirements in
subpart C of part 39 and to more closely
align the format of the subpart C
Election Form with Form DCO by
specifying the information and/or
documentation that must be provided
by a DCO as part of its petition for
subpart C election. Currently, unlike
Form DCO, the subpart C Election Form
references the corresponding regulations
in subpart C but does not specify the
type or level of information that must be
filed as an exhibit. The proposed
amendments are intended to provide
greater transparency and clarity as to the
type of information required.
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b. Costs
Because most of the proposed changes
to subpart C of part 39 are meant to
clarify existing requirements, the
Commission does not expect that
SIDCOs and subpart C DCOs would
incur additional costs. Where reporting
is required under proposed § 39.37(b),
the Commission believes any cost
associated with such notice would be
nominal for SIDCOs and subpart C
DCOs, as they would already be
required to periodically update the
information publicly.
c. Section 15(a) Factors
In addition to the discussion above,
the Commission has evaluated the costs
and benefits in light of the specific
considerations identified in section
15(a) of the CEA. In consideration of
section 15(a)(2)(A) and (B) of the CEA,
respectively, the Commission believes
that the proposed amendments would
protect market participants and the
public, and promote the financial
integrity of SIDCOs and the derivatives
markets by, for example, clarifying
SIDCO financial resources requirements,
requiring the use of central bank
accounts, where practical, and ensuring
that SIDCOs continue to test their
margin models with sufficient
frequency. Moreover, in consideration
of section 15(a)(2)(D) of the CEA, the
Commission believes the proposed
amendments to § 39.33(c)(1) would
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promote sound risk management
policies by reducing currency risk for
SIDCOs and subpart C DCOs by
ensuring that these DCOs have sufficient
liquidity in the relevant currency of
corresponding obligations during the
time it would take to liquidate or
auction a defaulted clearing member’s
positions. The Commission has
considered the other section 15(a)
factors and believes that they are not
implicated by the proposed
amendments.
20. Part 140—Organization, Functions,
and Procedures of the Commission
a. Benefits
The Commission is proposing to
amend § 140.94 to provide the Director
of the Division with delegated authority
to review DCO registration applications,
determine whether an application is
materially complete, request additional
information in support of an
application, stay the running of the 180day review period for an application,
and request additional information in
support of a rule submission. The
Commission believes that DCOs would
benefit from the proposed delegation of
authority, as it would promote a more
efficient process to address these
aspects of registration and rule
certification.
b. Costs
The Commission has not identified
any costs on DCOs or their members
associated with the proposed
amendments to § 140.94.
c. Section 15(a) Factors
The Commission has considered the
section 15(a) factors and believes that
they are not implicated by this proposed
amendment.
D. Antitrust Considerations
Section 15(b) of the CEA requires the
Commission to take into consideration
the public interest to be protected by the
antitrust laws and endeavor to take the
least anticompetitive means of
achieving the purposes of the CEA, in
issuing any order or adopting any
Commission rule or regulation.93
The Commission believes that the
public interest to be protected by the
antitrust laws is generally the promotion
of competition. The Commission
requests comment on whether the
proposed rulemaking implicates any
other specific public interest to be
protected by the antitrust laws. The
Commission has considered the
proposed rulemaking to determine
whether it is anticompetitive and has
93 7
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identified no anticompetitive effects.
The Commission requests comment on
whether the proposed rulemaking is
anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has
determined that the proposed rules are
not anticompetitive and have no
anticompetitive effects, the Commission
has not identified any less
anticompetitive means of achieving the
purposes of the CEA. The Commission
requests comment on whether there are
less anticompetitive means of achieving
the relevant purposes of the CEA that
would otherwise be served by adopting
the proposed rules.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures,
Consumer protection, Definitions,
Reporting and recordkeeping
requirements, Swaps.
17 CFR Part 39
Application form, Business and
industry, Commodity futures, Consumer
protection, Default rules and
procedures, Definitions, Enforcement
authority, Participant and product
eligibility, Reporting and recordkeeping
requirements, Risk management,
Settlement procedures, Swaps,
Treatment of funds.
17 CFR Part 140
Authority delegations (Government
agencies), Conflict of interests,
Organization and functions
(Government agencies).
For the reasons stated in the
preamble, the Commodity Futures
Trading Commission proposes to amend
17 CFR chapter I as follows:
PART 1—GENERAL REGULATIONS
UNDER THE COMMODITY EXCHANGE
ACT
1. The authority citation for part 1
continues to read as follows:
■
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c,
6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 6p,
6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 12,
12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, and
24 (2012).
2. In § 1.20, revise paragraphs (d)(1),
(7), and (8) introductory text to read as
follows:
■
§ 1.20 Futures customer funds to be
segregated and separately accounted for.
*
*
*
*
*
(d) * * *
(1) A futures commission merchant
must obtain a written acknowledgment
from each bank, trust company,
derivatives clearing organization, or
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futures commission merchant prior to or
contemporaneously with the opening of
an account by the futures commission
merchant with such depositories;
provided, however, that a written
acknowledgment need not be obtained
from a derivatives clearing organization
that has adopted and submitted to the
Commission rules that provide for the
segregation of futures customer funds in
accordance with all relevant provisions
of the Act and the rules in this chapter,
and orders promulgated thereunder, and
in such cases, the requirements set forth
in paragraphs (d)(3) through (6) of this
section shall not apply to the futures
commission merchant.
*
*
*
*
*
(7) Where a written acknowledgment
is required, the futures commission
merchant shall promptly file a copy of
the written acknowledgment with the
Commission in the format and manner
specified by the Commission no later
than three business days after the
opening of the account or the execution
of a new written acknowledgment for an
existing account, as applicable.
(8) Where a written acknowledgment
is required, a futures commission
merchant shall obtain a new written
acknowledgment within 120 days of any
changes in the following:
*
*
*
*
*
■ 3. In § 1.59, revise paragraph (a)(1) to
read as follows:
§ 1.59 Activities of self-regulatory
organization employees, governing board
members, committee members, and
consultants.
(a) * * *
(1) Self-regulatory organization means
a ‘‘self-regulatory organization,’’ as
defined in § 1.3.
*
*
*
*
*
■ 4. In § 1.63, revise paragraph (a)(1) to
read as follows:
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§ 1.63 Service on self-regulatory
organization governing boards or
committees by persons with disciplinary
histories.
(a) * * *
(1) Self-regulatory organization means
a ‘‘self-regulatory organization,’’ as
defined in § 1.3, except as defined in
paragraph (b)(6) of this section.
*
*
*
*
*
■ 5. In § 1.64, revise paragraph (a)(1) to
read as follows:
§ 1.64 Composition of various selfregulatory organization governing boards
and major disciplinary committees.
(a) * * *
(1) Self-regulatory organization means
‘‘self-regulatory organization,’’ as
defined in § 1.3.
*
*
*
*
*
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6. In § 1.69, revise paragraph (a)(7) to
read as follows:
■
§ 1.69 Voting by interested members of
self-regulatory organization governing
boards and various committees.
(a) * * *
(7) Self-regulatory organization means
a ‘‘self-regulatory organization,’’ as
defined in § 1.3, but excludes registered
futures associations for the purposes of
paragraph (b)(2) of this section.
*
*
*
*
*
PART 39—DERIVATIVES CLEARING
ORGANIZATIONS
7. The authority citation for part 39
continues to read as follows:
■
Authority: 7 U.S.C. 2, 7a–1, and 12a; 12
U.S.C. 5464; 15 U.S.C. 8325.
■
8. Revise § 39.2 to read as follows:
§ 39.2
Definitions.
For the purposes of this part:
Activity with a more complex risk
profile includes:
(1) Clearing credit default swaps,
credit default futures, or derivatives that
reference either credit default swaps or
credit default futures and
(2) Any other activity designated as
such by the Commission pursuant to
§ 39.33(a)(3).
Back test means a test that compares
a derivatives clearing organization’s
initial margin requirements with
historical price changes to determine
the extent of actual margin coverage.
Business day means the intraday
period of time starting at the business
hour of 8:15 a.m. and ending at the
business hour of 4:45 p.m., on all days
except Saturdays, Sundays, Federal
holidays established under 5 U.S.C.
6103, and foreign holidays. For
purposes of this provision, a foreign
holiday is a day on which a derivatives
clearing organization and its domestic
financial markets are closed for a
holiday that is not a Federal holiday in
the United States.
Customer account or customer origin
means ‘‘customer account’’ as defined in
§ 1.3 of this chapter.
Depository institution has the
meaning set forth in section 19(b)(1)(A)
of the Federal Reserve Act (12 U.S.C.
461(b)(1)(A)).
Enterprise risk management means an
enterprise-wide strategic business
process intended to identify potential
events that may affect the enterprise and
to manage the probability or impact of
those events on the enterprise as a
whole, such that the overall risk
remains within the enterprise’s risk
appetite and provides reasonable
assurance that the derivatives clearing
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organization can continue to achieve its
objectives.
Fully-collateralized position means a
contract cleared by a derivatives
clearing organization that requires the
derivatives clearing organization to
hold, at all times, funds in the form of
the required payment sufficient to cover
the maximum possible loss that a
counterparty could incur upon
liquidation or expiration of the contract.
House account or house origin means
a clearing member account which is not
subject to section 4d(a) or 4d(f) of the
Act.
Key personnel means derivatives
clearing organization personnel who
play a significant role in the operations
of the derivatives clearing organization,
the provision of clearing and settlement
services, risk management, or oversight
of compliance with the Act and
Commission regulations in this chapter,
and orders promulgated thereunder. Key
personnel include, but are not limited
to, those persons who are or perform the
functions of any of the following: Chief
executive officer; president; chief
compliance officer; chief operating
officer; chief risk officer; chief financial
officer; chief technology officer; chief
information security officer; and
emergency contacts or persons who are
responsible for business continuity or
disaster recovery planning or program
execution.
Stress test means a test that compares
the impact of potential extreme price
moves, changes in option volatility,
and/or changes in other inputs that
affect the value of a position, to the
financial resources of a derivatives
clearing organization, clearing member,
or large trader, to determine the
adequacy of the financial resources of
such entities.
Subpart C derivatives clearing
organization means any derivatives
clearing organization, as defined in
section 1a(15) of the Act and § 1.3 of
this chapter, which:
(1) Is registered as a derivatives
clearing organization under section 5b
of the Act;
(2) Is not a systemically important
derivatives clearing organization; and
(3) Has become subject to the
provisions of subpart C of this part,
pursuant to § 39.31.
Systemically important derivatives
clearing organization means a financial
market utility that is a derivatives
clearing organization registered under
section 5b of the Act, which is currently
designated by the Financial Stability
Oversight Council to be systemically
important and for which the
Commission acts as the Supervisory
Agency pursuant to 12 U.S.C. 5462(8).
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Trust company means a trust
company that is a member of the
Federal Reserve System, under section 1
of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the
definition of depository institution as
set out in this section.
U.S. branch or agency of a foreign
banking organization means the U.S.
branch or agency of a foreign banking
organization as defined in section 1(b)
of the International Banking Act of 1978
(12 U.S.C. 3101).
■ 9. Revise § 39.3 to read as follows:
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§ 39.3
Procedures for registration.
(a) Application for registration—(1)
General procedure. An entity seeking to
register as a derivatives clearing
organization shall file an application for
registration with the Secretary of the
Commission in the format and manner
specified by the Commission. The
Commission will review the application
for registration as a derivatives clearing
organization pursuant to the 180-day
timeframe and procedures specified in
section 6(a) of the Act, and may approve
or deny the application. If the
Commission approves the application,
the Commission will register the
applicant as a derivatives clearing
organization subject to conditions as
appropriate.
(2) Application. Any entity seeking to
register as a derivatives clearing
organization shall submit to the
Commission a completed Form DCO,
which shall include a cover sheet, all
applicable exhibits, and any
supplemental materials, as provided in
appendix A to this part (application).
The Commission will not commence
processing an application unless the
applicant has filed the application as
required by this section. Failure to file
a completed application will preclude
the Commission from determining that
an application is materially complete, as
provided in section 6(a) of the Act.
Upon its own initiative, an applicant
may file with its completed application
additional information that may be
necessary or helpful to the Commission
in processing the application.
(3) Submission of supplemental
information. The filing of a completed
application is a minimum requirement
and does not create a presumption that
the application is materially complete or
that supplemental information will not
be required. At any time during the
application review process, the
Commission may request that the
applicant provide supplemental
information in order for the Commission
to process the application. The
applicant shall provide supplemental
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information in the format and manner
specified by the Commission.
(4) Application amendments. An
applicant shall promptly amend its
application if it discovers a material
omission or error, or if there is a
material change in the information
provided to the Commission in the
application or other information
provided in connection with the
application. An applicant is only
required to submit exhibits and other
information that are relevant to the
application amendment when filing a
Form DCO for the purpose of amending
its pending application.
(5) Public information. The following
sections of all applications to become a
registered derivatives clearing
organization will be public: First page of
the Form DCO cover sheet (up to and
including the General Information
section), Exhibit A–1 (regulatory
compliance chart), Exhibit A–2
(proposed rulebook), Exhibit A–3
(narrative summary of proposed clearing
activities), Exhibit A–7 (documents
setting forth the applicant’s corporate
organizational structure), Exhibit A–8
(documents establishing the applicant’s
legal status and certificate(s) of good
standing or its equivalent), and any
other part of the application not covered
by a request for confidential treatment,
subject to § 145.9 of this chapter.
(6) Extension of time for review. The
Commission may further extend the
review period in paragraph (a)(1) of this
section for any period of time to which
the applicant agrees in writing.
(b) Stay of application review—(1) By
the Commission. The Commission may
stay the running of the 180-day review
period if an application is materially
incomplete, in accordance with section
6(a) of the Act.
(2) Delegation of authority. (i) The
Commission hereby delegates, until it
orders otherwise, to the Director of the
Division of Clearing and Risk or the
Director’s designee, with the
concurrence of the General Counsel or
the General Counsel’s designee, the
authority to notify an applicant seeking
registration as a derivatives clearing
organization that the application is
materially incomplete and the running
of the 180-day period under section 6(a)
of the Act is stayed.
(ii) The Director of the Division of
Clearing and Risk may submit to the
Commission for its consideration any
matter which has been delegated in this
paragraph (b)(2).
(iii) Nothing in this paragraph (b)(2)
prohibits the Commission, at its
election, from exercising the authority
delegated in paragraph (b)(2)(i) of this
section.
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(c) Withdrawal of application for
registration. An applicant for
registration may withdraw its
application submitted pursuant to
paragraph (a) of this section by filing
such a request with the Secretary of the
Commission in the format and manner
specified by the Commission.
Withdrawal of an application for
registration shall not affect any action
taken or to be taken by the Commission
based upon actions, activities, or events
occurring during the time that the
application for registration was pending
with the Commission.
(d) Amendment of an order of
registration. (1) A derivatives clearing
organization requesting an amendment
to an order of registration shall file the
request with the Secretary of the
Commission in the form and manner
specified by the Commission.
(2) A derivatives clearing organization
shall provide to the Commission, upon
the Commission’s request, any
additional information and
documentation necessary to review a
request to amend an order of
registration.
(3) The Commission shall issue an
amended order of registration upon a
Commission determination, in its own
discretion, that the derivatives clearing
organization would maintain
compliance with the Act and the
Commission’s regulations in this
chapter upon amendment to the order.
If deemed appropriate, the Commission
may issue an amended order of
registration subject to conditions.
(4) The Commission may decline to
issue an amended order based upon a
Commission determination, in its own
discretion, that the derivatives clearing
organization would not continue to
maintain compliance with the Act and
the Commission’s regulations in this
chapter upon amendment to the order.
(e) Reinstatement of dormant
registration. Before accepting products
for clearing, a dormant derivatives
clearing organization as defined in
§ 40.1 of this chapter must reinstate its
registration under the procedures of
paragraph (a) of this section; provided,
however, that an application for
reinstatement may rely upon previously
submitted materials that still pertain to,
and accurately describe, current
conditions.
(f) Vacation of registration—(1)
Request. A registered derivatives
clearing organization may have its
registration vacated pursuant to section
7 of the Act by submitting a request to
the Secretary of the Commission in the
format and manner specified by the
Commission. A vacation of registration
shall not affect any action taken or to be
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taken by the Commission based upon
actions, activities or events occurring
during the time that the derivatives
clearing organization was registered
with the Commission. The request shall
include:
(i) The date that the vacation should
take effect, which must be at least
ninety days after the request was
submitted;
(ii) A description of how the
derivatives clearing organization
intends to transfer or otherwise unwind
all open positions at the derivatives
clearing organization and how such
actions reflect the interests of affected
clearing members and their customers;
(iii) A statement that the derivatives
clearing organization will continue to
maintain its books and records for the
requisite statutory and regulatory
retention periods after its registration
has been vacated; and
(iv) A statement that the derivatives
clearing organization will continue to
make its books and records available for
inspection by any representative of the
Commission or the United States
Department of Justice after its
registration has been vacated, as
required by § 1.31 of this chapter.
(2) Notice to registered entities. The
Commission shall fulfill its obligation to
send a copy of the request and the order
of vacation to all other registered
entities by posting the documents on the
Commission website.
(g) Request for transfer of open
interest—(1) Submission. A derivatives
clearing organization seeking to transfer
its positions comprising open interest
for clearing and settlement to another
derivatives clearing organization shall
submit rules for Commission approval
pursuant to § 40.5 of this chapter.
(2) Required information. The rule
submission shall include, at a
minimum, the following:
(i) The underlying agreement that
governs the transfer;
(ii) A description of the transfer,
including the reason for the transfer and
the impact of the transfer on the rights
and obligations of clearing members and
market participants holding the
positions that comprise the derivatives
clearing organization’s open interest;
(iii) A discussion of the transferee’s
ability to comply with the Act,
including the core principles applicable
to derivatives clearing organizations,
and the Commission’s regulations in
this chapter;
(iv) The transferee’s rules marked to
show changes that would result from
acceptance of the transferred positions;
(v) A list of products for which the
derivatives clearing organization
requests transfer of open interest; and
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(vi) A representation by the transferee
that it is in and will maintain
compliance with the Act, including the
core principles applicable to derivatives
clearing organizations, and the
Commission’s regulations in this
chapter upon the transfer of the open
interest.
(3) Commission action. The
Commission may request additional
information in support of a rule
submission filed under paragraph (g)(1)
of this section, and may grant approval
of the rules in accordance with § 40.5 of
this chapter.
■ 10. In § 39.4, revise paragraphs (a) and
(e) to read as follows:
§ 39.4 Procedures for implementing
derivatives clearing organization rules and
clearing new products.
(a) Request for approval of rules. A
registered derivatives clearing
organization may request, pursuant to
the procedures of § 40.5 of this chapter,
that the Commission approve any or all
of its rules and subsequent amendments
thereto, including operational rules,
prior to their implementation or,
notwithstanding the provisions of
section 5c(c)(2) of the Act, at any time
thereafter, under the procedures of
§ 40.5 of this chapter. A derivatives
clearing organization may label as
‘‘approved by the Commission’’ only
those rules that have been so approved.
*
*
*
*
*
(e) Holding securities in a futures
portfolio margining account. A
derivatives clearing organization
seeking to provide a portfolio margining
program under which securities would
be held in a futures account as defined
in § 1.3 of this chapter, shall submit
rules to implement such portfolio
margining program for Commission
approval in accordance with § 40.5 of
this chapter. Concurrent with the
submission of such rules for
Commission approval, the derivatives
clearing organization shall petition the
Commission for an order under section
4d(a) of the Act.
■ 11. In § 39.10, revise paragraphs (c)(1),
(3) and (4) and add paragraph (d) to read
as follows:
§ 39.10
Compliance with core principles.
*
*
*
*
*
(c) * * *
(1) Designation. Each derivatives
clearing organization shall establish the
position of chief compliance officer,
designate an individual to serve as the
chief compliance officer, and provide
the chief compliance officer with full
responsibility and authority to develop
and enforce, in consultation with the
board of directors or the senior officer,
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appropriate compliance policies and
procedures, to fulfill the duties set forth
in the Act and Commission regulations
in this chapter.
(i) The individual designated to serve
as chief compliance officer shall have
the background and skills appropriate
for fulfilling the responsibilities of the
position. No individual who would be
disqualified from registration under
sections 8a(2) or 8a(3) of the Act may
serve as the chief compliance officer.
(ii) The chief compliance officer shall
report to the board of directors or the
senior officer of the derivatives clearing
organization or, if the derivatives
clearing organization engages in
substantial activities not related to
clearing, the senior officer responsible
for the derivatives clearing
organization’s clearing activities. The
board of directors or the senior officer
shall approve the compensation of the
chief compliance officer.
(iii) The chief compliance officer shall
meet with the board of directors or the
senior officer at least once a year.
(iv) A change in the designation of the
individual serving as the chief
compliance officer of the derivatives
clearing organization shall be reported
to the Commission in accordance with
the requirements of § 39.19(c)(4)(x).
*
*
*
*
*
(3) Annual report. The chief
compliance officer shall, not less than
annually, prepare and sign a written
report that covers the most recently
completed fiscal year of the derivatives
clearing organization. The annual report
shall, at a minimum:
(i) Contain a description of the
derivatives clearing organization’s
written policies and procedures,
including the code of ethics and conflict
of interest policies; provided that, to the
extent that the derivatives clearing
organization’s written policies and
procedures have not materially changed
since they were most recently described
in an annual report to the Commission,
and if the annual report containing the
most recent description was submitted
within the last five years, the annual
report may instead incorporate by
reference the relevant descriptions from
the most recent annual report
containing the description;
(ii) Review each core principle and
applicable Commission regulation in
this chapter including, in the case of
systemically important derivatives
clearing organizations and subpart C
derivatives clearing organizations,
regulations in subpart C of this part, and
with respect to each:
(A) Identify, by name, rule number, or
other identifier, the compliance policies
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and procedures that are designed to
ensure compliance with each core
principle and applicable regulation in
this chapter;
(B) Provide an assessment as to the
effectiveness of these policies and
procedures;
(C) Discuss areas for improvement,
and recommend potential or prospective
changes or improvements to the
derivatives clearing organization’s
compliance program and resources
allocated to compliance;
(iii) List any material changes to
compliance policies and procedures
since the last annual report;
(iv) Describe the financial,
managerial, and operational resources
set aside for compliance with the Act
and Commission regulations in this
chapter; and
(v) Describe any material compliance
matters, including incidents of
noncompliance, since the date of the
last annual report, and describe the
corresponding action taken.
(4) Submission of annual report to the
Commission. (i) Prior to submitting the
annual report to the Commission, the
chief compliance officer shall provide
the annual report to the board of
directors or the senior officer of the
derivatives clearing organization or, if
the derivatives clearing organization
engages in substantial activities not
related to clearing, the senior officer
responsible for the derivatives clearing
organization’s clearing activities, for
review. Submission of the report to the
board of directors or the senior officer
shall be recorded in the board minutes
or otherwise, as evidence of compliance
with the requirement in this paragraph
(c)(4)(i). The annual report shall
describe the process by which it was
submitted to the board of directors or
the senior officer, including the date of
submission.
(ii) The annual report shall be
submitted to the Secretary of the
Commission in the format and manner
specified by the Commission not more
than 90 days after the end of the
derivatives clearing organization’s fiscal
year. The report shall include a
certification by the chief compliance
officer that, to the best of his or her
knowledge and reasonable belief, and
under penalty of law, the annual report
is accurate and complete.
(iii) The derivatives clearing
organization shall promptly submit an
amended annual report if material errors
or omissions in the report are identified
after submission. An amendment must
contain the certification required under
paragraph(c)(4)(ii) of this section.
(iv) A derivatives clearing
organization may request from the
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Commission an extension of time to
submit its annual report in accordance
with § 39.19(c)(3).
*
*
*
*
*
(d) Enterprise risk management—(1)
General. A derivatives clearing
organization shall have an enterprise
risk management program that identifies
and assesses sources of risk and their
potential impact on the operations and
services of the derivatives clearing
organization. The derivatives clearing
organization shall measure, monitor,
and manage identified sources of risk on
an ongoing basis, including through the
development and use of appropriate
information systems. The derivatives
clearing organization shall test the
effectiveness of any mitigating controls
employed to reduce identified sources
of risk to ensure that the risks are
properly mitigated.
(2) Enterprise risk management
framework. A derivatives clearing
organization shall establish and
maintain written policies and
procedures, approved by its board of
directors or a committee of the board of
directors that establish an appropriate
enterprise risk management framework.
The framework shall be reviewed at
least annually by the board of directors
or committee of the board of directors
and updated as necessary.
(3) Standards for enterprise risk
management framework. A derivatives
clearing organization shall follow
generally accepted standards and
industry best practices in the
development and review of its
enterprise risk management framework,
assessment of the performance of its
enterprise risk management program,
and management and mitigation of risk
to the derivatives clearing organization.
(4) Enterprise risk officer. A
derivatives clearing organization shall
identify as its enterprise risk officer an
appropriate individual that exercises the
full responsibility and authority to
manage the enterprise risk management
program of the derivatives clearing
organization. The enterprise risk officer
shall have the authority, independence,
resources, expertise, and access to
relevant information necessary to fulfil
the responsibilities of the position
consistent with the requirements of this
section.
■ 12. Revise § 39.11 to read as follows:
§ 39.11
Financial resources.
(a) General. A derivatives clearing
organization shall have adequate
financial, operational, and managerial
resources, as determined by the
Commission, to discharge each
responsibility of the derivatives clearing
organization. A derivatives clearing
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organization shall maintain sufficient
financial resources to cover its
exposures with a high degree of
confidence. At a minimum, each
derivatives clearing organization shall
possess financial resources that exceed
the total amount that would:
(1) Enable the derivatives clearing
organization to meet its financial
obligations to its clearing members
notwithstanding a default by the
clearing member creating the largest
financial exposure for the derivatives
clearing organization in extreme but
plausible market conditions; Provided
that if a clearing member controls
another clearing member or is under
common control with another clearing
member, the affiliated clearing members
shall be deemed to be a single clearing
member for purposes of the provision in
this paragraph (a)(1); and
(2) Enable the derivatives clearing
organization to cover its operating costs
for a period of at least one year,
calculated on a rolling basis. A
derivatives clearing organization shall
identify and adequately manage its
general business risks and hold
sufficient liquid resources to cover
potential business losses that are not
related to clearing members’ defaults, so
that the derivatives clearing
organization can continue to provide
services as a going concern.
(b) Types of financial resources. (1)
Financial resources available to satisfy
the requirements of paragraph (a)(1) of
this section may include:
(i) The derivatives clearing
organization’s own capital;
(ii) Guaranty fund deposits;
(iii) Default insurance;
(iv) Potential assessments for
additional guaranty fund contributions,
if permitted by the derivatives clearing
organization’s rules; and
(v) Any other financial resource
deemed acceptable by the Commission.
(2) Financial resources available to
satisfy the requirements of paragraph
(a)(2) of this section shall include:
(i) The derivatives clearing
organization’s own capital; and
(ii) Any other financial resource
deemed acceptable to the Commission.
(3) A financial resource may be
allocated, in whole or in part, to satisfy
the requirements of either paragraph
(a)(1) or (2) of this section, but not both
paragraphs, and only to the extent the
use of such financial resource is not
otherwise limited by the Act,
Commission regulations in this chapter,
the derivatives clearing organization’s
rules, or any other contractual
arrangements to which the derivatives
clearing organization is a party.
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(c) Calculation of financial resources
requirements. (1) A derivatives clearing
organization shall, on a monthly basis,
perform stress tests that will allow it to
make a reasonable calculation of the
financial resources needed to meet the
requirements of paragraph (a)(1) of this
section. The derivatives clearing
organization shall have reasonable
discretion in determining the
methodology used to calculate the
requirements, subject to the limitations
identified in paragraph (c)(2) of this
section, and provided that the
methodology must take into account
both historical data and hypothetical
scenarios. The Commission may review
the methodology and require changes as
appropriate. The requirements of this
paragraph (c) do not apply to fullycollateralized positions.
(2) When calculating its largest
financial exposure, a derivatives
clearing organization:
(i) In netting its exposure against the
clearing member’s initial margin, shall:
(A) Use that portion of the margin
amount on deposit that is required; and
(B) Use customer initial margin only
to the extent permitted by parts 1 and
22 of this chapter, as applicable;
(ii) Shall combine the customer and
house stress test losses of each clearing
member using the same stress test
scenarios;
(iii) May net any gains in the house
account with losses in the customer
account, if permitted by the derivatives
clearing organization’s rules, but shall
not net losses in the house account with
gains in the customer account; and
(iv) With respect to a clearing
member’s cleared swaps customer
account, may net gains for one customer
against losses for another customer only
to the extent permitted by the
derivatives clearing organization’s rules.
(3) A derivatives clearing organization
shall, on a monthly basis, make a
reasonable calculation of its projected
operating costs over a 12-month period
in order to determine the amount
needed to meet the requirements of
paragraph (a)(2) of this section. The
derivatives clearing organization shall
have reasonable discretion in
determining the methodology used to
compute such projected operating costs.
The Commission may review the
methodology and require changes as
appropriate.
(d) Valuation of financial resources.
(1) At appropriate intervals, but not less
than monthly, a derivatives clearing
organization shall compute the current
market value of each financial resource
used to meet its obligations under
paragraph (a) of this section. Reductions
in value to reflect credit, market, and
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liquidity risks (haircuts) shall be
applied as appropriate and evaluated on
a monthly basis.
(2) If assessments for additional
guaranty fund contributions are
permitted by the derivatives clearing
organization’s rules, in calculating the
financial resources available to meet its
obligations under paragraph (a)(1) of
this section:
(i) The derivatives clearing
organization shall have rules requiring
that its clearing members have the
ability to meet an assessment within the
time frame of a normal end-of-day
variation settlement cycle;
(ii) The derivatives clearing
organization shall monitor the financial
and operational capacity of its clearing
members to meet potential assessments;
(iii) The derivatives clearing
organization shall apply a 30 percent
haircut to the value of potential
assessments; and
(iv) The derivatives clearing
organization shall only count the value
of assessments, after the haircut, to meet
up to 20 percent of the total amount
required under paragraph (a)(1) of this
section.
(e) Liquidity of financial resources.
(1)(i) The derivatives clearing
organization shall effectively measure,
monitor, and manage its liquidity risks,
maintaining sufficient liquid resources
such that it can, at a minimum, fulfill
its cash obligations when due. The
derivatives clearing organization shall
hold assets in a manner where the risk
of loss or of delay in its access to them
is minimized.
(ii) The financial resources allocated
by the derivatives clearing organization
to meet the requirements of paragraph
(a)(1) of this section shall be sufficiently
liquid to enable the derivatives clearing
organization to fulfill its obligations as
a central counterparty during a one-day
settlement cycle. The derivatives
clearing organization shall maintain
cash, U.S. Treasury obligations, or high
quality, liquid, general obligations of a
sovereign nation, in an amount greater
than or equal to an amount calculated
as follows:
(A) Calculate the average daily
settlement variation pay for each
clearing member over the last fiscal
quarter;
(B) Calculate the sum of those average
daily settlement variation pays; and
(C) Using that sum, calculate the
average of its clearing members’ average
daily settlement variation pays.
(iii) If the total amount of the financial
resources required pursuant to the
calculation set forth in paragraph
(e)(1)(ii) of this section is insufficient to
enable the derivatives clearing
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organization to fulfill its obligations
during a one-day settlement cycle, the
derivatives clearing organization may
take into account a committed line of
credit or similar facility for the purpose
of meeting the remainder of the
requirement of this paragraph (e)
(subject to the limitation in paragraph
(e)(3) of this section).
(iv) A derivatives clearing
organization is not subject to paragraph
(e)(1)(ii) of this section for fullycollateralized positions.
(2) The financial resources allocated
by the derivatives clearing organization
to meet the requirements of paragraph
(a)(2) of this section must include
unencumbered, liquid financial assets
(i.e., cash and/or highly liquid
securities) sufficient to enable the
derivatives clearing organization to
cover its operating costs for a period of
at least six months. If the financial
resources allocated to meet the
requirements of paragraph (a)(2) of this
section do not include such assets in a
sufficient amount, the derivatives
clearing organization may take into
account a committed line of credit or
similar facility for the purpose of
meeting the requirements of this
paragraph (subject to the limitation in
paragraph (e)(3) of this section).
(3) A committed line of credit or
similar facility may be allocated, in
whole or in part, to satisfy the
requirements of either paragraph
(e)(1)(ii) or (e)(2) of this section, but not
both paragraphs.
(4)(i) Assets in a guaranty fund shall
have minimal credit, market, and
liquidity risks and shall be readily
accessible on a same-day basis;
(ii) Cash balances shall be invested or
placed in safekeeping in a manner that
bears little or no principal risk; and
(iii) Letters of credit shall not be a
permissible asset for a guaranty fund.
(f) Reporting requirements—(1)
Quarterly reporting. Each fiscal quarter,
or at any time upon Commission
request, a derivatives clearing
organization shall:
(i) Report to the Commission:
(A) The amount of financial resources
necessary to meet the requirements of
paragraph (a) of this section and
§§ 39.33(a) and 39.39(d), if applicable;
(B) The value of each financial
resource available, computed in
accordance with the requirements of
paragraph (d) of this section; and
(C) The manner in which the
derivatives clearing organization meets
the liquidity requirements of paragraph
(e) of this section.
(ii) Provide the Commission with a
financial statement, including the
balance sheet, income statement, and
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statement of cash flows, prepared in
accordance with U.S. generally accepted
accounting principles, of the derivatives
clearing organization; provided,
however, that for a derivatives clearing
organization that is incorporated or
organized under the laws of any foreign
country, the financial statement may be
prepared in accordance with either U.S.
generally accepted accounting
principles or the International Financial
Reporting Standards issued by the
International Accounting Standards
Board. The balance sheet must identify
any assets allocated to satisfy the
requirements of paragraph (a)(1) or (2) of
this section as held for that purpose;
and
(iii) Report to the Commission the
value of each individual clearing
member’s guaranty fund deposit, if the
derivatives clearing organization reports
having guaranty fund deposits as a
financial resource available to satisfy
the requirements of paragraph (a)(1) of
this section and §§ 39.33(a) and
39.39(d), if applicable.
(iv) The calculations required by this
paragraph (f) shall be made as of the last
business day of the derivatives clearing
organization’s fiscal quarter. The report
shall be submitted not later than 17
business days after the end of the
derivatives clearing organization’s fiscal
quarter, or at such later time as the
Commission may permit, in its
discretion, upon request by the
derivatives clearing organization.
(2) Annual reporting. (i) A derivatives
clearing organization shall submit to the
Commission an audited year-end
financial statement of the derivatives
clearing organization calculated in
accordance with U.S. generally accepted
accounting principles; provided,
however, that for a derivatives clearing
organization that is incorporated or
organized under the laws of any foreign
country, the financial statement may be
prepared in accordance with either U.S.
generally accepted accounting
principles or the International Financial
Reporting Standards issued by the
International Accounting Standards
Board. The balance sheet must identify
any assets allocated to satisfy the
requirements of paragraph (a)(1) or (2) of
this section as held for that purpose.
(ii) The report required by paragraph
(f)(2)(i) of this section shall be submitted
not later than 90 days after the end of
the derivatives clearing organization’s
fiscal year, or at such later time as the
Commission may permit, in its
discretion, upon request by the
derivatives clearing organization.
(iii) A derivatives clearing
organization shall submit concurrently
with the audited year-end financial
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statement required by paragraph (f)(2)(i)
of this section:
(A) A reconciliation, including
appropriate explanations, of its balance
sheet in the audited year-end financial
statement with the balance sheet in the
derivatives clearing organization’s
financial statement for the last quarter of
the fiscal year when material differences
exist or, if no material differences exist,
a statement so indicating; and
(B) Such further information as may
be necessary to make the statements not
misleading.
(3) Other reporting. (i) A derivatives
clearing organization shall provide to
the Commission as part of its first report
under paragraph (f)(1) of this section,
and in the event of any change
thereafter:
(A) Sufficient documentation
explaining the methodology used to
compute its financial resources
requirements under paragraph (a) of this
section and §§ 39.33(a) and 39.39(d), if
applicable; and
(B) Sufficient documentation
explaining the basis for its
determinations regarding the valuation
and liquidity requirements set forth in
paragraphs (d) and (e) of this section.
(ii) A derivatives clearing organization
shall provide to the Commission copies
of any agreements establishing or
amending a credit facility, insurance
coverage, or other arrangement
evidencing or otherwise supporting the
derivatives clearing organization’s
conclusions regarding its:
(A) Financial resources available to
satisfy the requirements of paragraph (a)
of this section and §§ 39.33(a) and
39.39(d), if applicable; and
(B) Liquidity resources available to
satisfy the requirements of paragraph (e)
of this section and § 39.33(c), if
applicable.
(4) Certification. A derivatives
clearing organization shall provide with
each report submitted pursuant to this
section a certification by the person
responsible for the accuracy and
completeness of the report that, to the
best of his or her knowledge and
reasonable belief, and under penalty of
law, the information contained in the
report is accurate and complete.
■ 13. In § 39.12, revise paragraphs (a)
introductory text, (a)(1) introductory
text, (a)(1)(i), (a)(4), (5) and (6), (b)(1)
introductory text, and (b)(2) to read as
follows:
§ 39.12
Participant and product eligibility.
(a) Participant eligibility. A
derivatives clearing organization shall
have appropriate admission and
continuing participation requirements
for clearing members of the derivatives
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clearing organization that are objective,
publicly disclosed, and risk-based.
(1) Fair and open access for
participation. The participation
requirements shall permit fair and open
access.
(i) A derivatives clearing organization
shall not have restrictive clearing
member standards if less restrictive
requirements that achieve the same
objective and that would not materially
increase risk to the derivatives clearing
organization or clearing members could
be adopted;
*
*
*
*
*
(4) Monitoring. A derivatives clearing
organization shall have procedures to
verify, on an ongoing basis, the
compliance of each clearing member
with each participation requirement of
the derivatives clearing organization.
(5) Reporting. (i) A derivatives
clearing organization shall require all
clearing members, including nonfutures commission merchants, to
provide to the derivatives clearing
organization periodic financial reports
that contain any financial information
that the derivatives clearing
organization determines is necessary to
assess whether participation
requirements are being met on an
ongoing basis.
(ii) A derivatives clearing organization
shall require clearing members that are
futures commission merchants to
provide the financial reports that are
specified in § 1.10 of this chapter to the
derivatives clearing organization.
(iii) A derivatives clearing
organization shall require clearing
members that are not futures
commission merchants to make the
periodic financial reports provided
pursuant to paragraph (a)(5)(i) of this
section available to the Commission
upon the Commission’s request or, in
lieu of imposing the requirement in this
paragraph (a)(5)(iii), a derivatives
clearing organization may provide such
financial reports directly to the
Commission upon the Commission’s
request.
(iv) A derivatives clearing
organization shall have rules that
require clearing members to provide to
the derivatives clearing organization, in
a timely manner, information that
concerns any financial or business
developments that may materially affect
the clearing members’ ability to
continue to comply with participation
requirements under this section.
(v) The requirements in paragraphs
(a)(5)(i) and (iii) of this section shall not
apply with respect to non-futures
commission merchant clearing members
of a derivatives clearing organization
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that only clear fully-collateralized
positions.
(6) Enforcement. A derivatives
clearing organization shall have the
ability to enforce compliance with its
participation requirements and shall
have procedures for the suspension and
orderly removal of clearing members
that no longer meet the requirements.
(b) * * *
(1) A derivatives clearing organization
shall have appropriate requirements for
determining the eligibility of
agreements, contracts, or transactions
submitted to the derivatives clearing
organization for clearing, taking into
account the derivatives clearing
organization’s ability to manage the
risks associated with such agreements,
contracts, or transactions. Factors to be
considered in determining product
eligibility include, but are not limited
to:
*
*
*
*
*
(2) A derivatives clearing organization
that clears swaps shall have rules
providing that all swaps with the same
terms and conditions, as defined by
product specifications established under
derivatives clearing organization rules,
submitted to the derivatives clearing
organization for clearing are
economically equivalent within the
derivatives clearing organization and
may be offset with each other within the
derivatives clearing organization.
*
*
*
*
*
■ 14. In § 39.13, revise paragraphs (b),
(f), (g)(2)(i), (g)(3), (g)(4)(i) introductory
text, (g)(7), (8) and (12), (h)(1)(i)
introductory text, and (h)(3) and (5) and
add paragraph (i) to read as follows:
§ 39.13
Risk management.
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*
*
*
*
(b) Risk management framework. A
derivatives clearing organization shall
have and implement written policies,
procedures, and controls, approved by
its board of directors, that establish an
appropriate risk management framework
that, at a minimum, clearly identifies
and documents the range of risks to
which the derivatives clearing
organization is exposed, addresses the
monitoring and management of the
entirety of those risks, and provides a
mechanism for internal audit. The risk
management framework shall be
regularly reviewed and updated as
necessary.
*
*
*
*
*
(f) Limitation of exposure to potential
losses from defaults. A derivatives
clearing organization, through margin
requirements and other risk control
mechanisms, shall limit its exposure to
potential losses from defaults by its
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clearing members to minimize the risk
that:
(1) The operations of the derivatives
clearing organization would be
disrupted; and
(2) Non-defaulting clearing members
would be exposed to losses that nondefaulting clearing members cannot
anticipate or control.
(g) * * *
(2) * * *
(i) A derivatives clearing organization
shall have initial margin requirements
that are commensurate with the risks of
each product and portfolio, including
any unusual characteristics of, or risks
associated with, particular products or
portfolios, including but not limited to
jump-to-default risk or similar jump
risk, and concentration of positions.
*
*
*
*
*
(3) Independent validation. A
derivatives clearing organization shall
have its systems for generating initial
margin requirements, including its
theoretical models, reviewed and
validated by a qualified and
independent party on an annual basis.
Such qualified and independent parties
may be independent contractors or
employees of the derivatives clearing
organization, or of an affiliate of the
derivatives clearing organization, but
shall not be persons responsible for
development or operation of the systems
and models being tested.
(4) * * *
(i) A derivatives clearing organization
may allow reductions in initial margin
requirements for related positions if the
price risks with respect to such
positions are significantly and reliably
correlated. The price risks of different
positions will only be considered to be
reliably correlated if there is a
conceptual basis for the correlation in
addition to an exhibited statistical
correlation. That conceptual basis may
include, but is not limited to, the
following:
*
*
*
*
*
(7) Back tests. A derivatives clearing
organization shall conduct back tests, as
defined in § 39.2, using an appropriate
time period but not less than the
previous 30 days, as follows:
(i) On a daily basis, a derivatives
clearing organization shall conduct back
tests with respect to products or swap
portfolios that are experiencing
significant market volatility, to test the
adequacy of its initial margin
requirements, as follows:
(A) For that product if the derivatives
clearing organization uses a productbased margin methodology;
(B) For each spread involving that
product if there is a defined spread
margin rate;
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(C) For each account held by a
clearing member at the derivatives
clearing organization that contains a
significant position in that product, by
house origin and by each customer
origin; and
(D) For each such swap portfolio,
including any portfolio containing
futures and/or options and held in a
commingled account pursuant to
§ 39.15(b)(2), by beneficial owner.
(ii) On at least a monthly basis, a
derivatives clearing organization shall
conduct back tests to test the adequacy
of its initial margin requirements, as
follows:
(A) For each product for which the
derivatives clearing organization uses a
product-based margin methodology;
(B) For each spread for which there is
a defined spread margin rate;
(C) For each account held by a
clearing member at the derivatives
clearing organization, by house origin
and by each customer origin; and
(D) For each swap portfolio, including
any portfolio containing futures and/or
options and held in a commingled
account pursuant to § 39.15(b)(2), by
beneficial owner.
(iii) In conducting back tests of initial
margin requirements, a derivatives
clearing organization shall compare
portfolio losses only to those
components of initial margin that
capture changes in market risk factors.
(8) Customer margin—(i) Gross
margin. (A) During the end-of-day
settlement cycle, a derivatives clearing
organization shall collect initial margin
on a gross basis for each clearing
member’s customer account(s) equal to
the sum of the initial margin amounts
that would be required by the
derivatives clearing organization for
each individual customer within that
account if each individual customer
were a clearing member.
(B) For purposes of calculating the
gross initial margin requirement for
each clearing member’s customer
account(s), a derivatives clearing
organization shall have rules that
require its clearing members to provide
to the derivatives clearing organization
reports each day setting forth end-of-day
gross positions of each beneficial owner
within each customer origin of the
clearing member.
(C) A derivatives clearing organization
may not, and may not permit its clearing
members to, net positions of different
customers against one another.
(D) A derivatives clearing
organization may collect initial margin
for its clearing members’ house accounts
on a net basis.
(ii) Customer initial margin
requirements. A derivatives clearing
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organization shall require its clearing
members to collect customer initial
margin at a level that is not less than
100 percent of the derivatives clearing
organization’s clearing initial margin
requirements with respect to each
product and portfolio and
commensurate with the risk presented
by each customer account. The
derivatives clearing organization shall
have reasonable discretion in
determining whether and by how much
such customer initial margin
requirements must exceed the
derivatives clearing organization’s
clearing initial margin requirements
with respect to particular products or
portfolios. The Commission may review
such customer initial margin levels and
require different levels if the
Commission deems the levels
insufficient to protect the financial
integrity of the derivatives clearing
organization or its clearing members.
(iii) Withdrawal of customer initial
margin. A derivatives clearing
organization shall require its clearing
members to ensure that their customers
do not withdraw funds from their
accounts with such clearing members
unless the net liquidating value plus the
margin deposits remaining in a
customer’s account after such
withdrawal are sufficient to meet the
customer initial margin requirements
with respect to all products and swap
portfolios held in such customer’s
account which are cleared by the
derivatives clearing organization.
*
*
*
*
*
(12) Haircuts. A derivatives clearing
organization shall apply appropriate
reductions in value to reflect credit,
market, and liquidity risks (haircuts), to
the assets that it accepts in satisfaction
of initial margin obligations, taking into
consideration stressed market
conditions, and shall evaluate the
appropriateness of the haircuts on at
least a monthly basis.
*
*
*
*
*
(h) * * *
(1) * * *
(i) A derivatives clearing organization
shall impose risk limits on each clearing
member, by house origin and by each
customer origin, in order to prevent a
clearing member from carrying positions
for which the risk exposure exceeds a
specified threshold relative to the
clearing member’s and/or the
derivatives clearing organization’s
financial resources, and to address
positions that may be difficult to
liquidate. The derivatives clearing
organization shall have reasonable
discretion in determining:
*
*
*
*
*
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(3) Stress tests. A derivatives clearing
organization shall conduct stress tests,
as defined in § 39.2, as follows:
(i) On a daily basis, a derivatives
clearing organization shall conduct
stress tests with respect to each large
trader who poses significant risk to a
clearing member or the derivatives
clearing organization, including futures,
options, and swaps cleared by the
derivatives clearing organization, which
are held by all clearing members
carrying accounts for each such large
trader. The derivatives clearing
organization shall have reasonable
discretion in determining which traders
to test and the methodology used to
conduct such stress tests. The
Commission may review the selection of
accounts and the methodology and
require changes, as appropriate.
(ii) On at least a weekly basis, a
derivatives clearing organization shall
conduct stress tests with respect to each
clearing member account, by house
origin and by each customer origin, and
each swap portfolio, including any
portfolio containing futures and/or
options and held in a commingled
account pursuant to § 39.15(b)(2), by
beneficial owner, under extreme but
plausible market conditions. The
derivatives clearing organization shall
have reasonable discretion in
determining the methodology used to
conduct such stress tests. The
Commission may review the
methodology and require changes, as
appropriate.
(iii) The requirements in paragraphs
(h)(3)(i) and (ii) of this section do not
apply with respect to clearing member
accounts that hold only fullycollateralized positions.
*
*
*
*
*
(5) Clearing members’ risk
management policies and procedures.
(i) A derivatives clearing organization
shall have rules that:
(A) Require its clearing members to
maintain current written risk
management policies and procedures,
which address the risks that such
clearing members may pose to the
derivatives clearing organization;
(B) Ensure that it has the authority to
request and obtain information and
documents from its clearing members
regarding their risk management
policies, procedures, and practices,
including, but not limited to,
information and documents relating to
the liquidity of their financial resources
and their settlement procedures; and
(C) Require its clearing members to
make information and documents
regarding their risk management
policies, procedures, and practices
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available to the Commission upon the
Commission’s request.
(ii) A derivatives clearing organization
shall review the risk management
policies, procedures, and practices of
each of its clearing members, which
address the risks that such clearing
members may pose to the derivatives
clearing organization, on a periodic
basis, take appropriate action to address
concerns identified in such reviews, and
document such reviews and the basis
for determining what action was
appropriate to take.
*
*
*
*
*
(i) Cross-margining. (1) A derivatives
clearing organization that seeks to
implement a cross-margining program
with one or more clearing organizations
shall file rules for Commission approval
pursuant to § 40.5 of this chapter that
contain, at a minimum, the following
information:
(i) Identification of the products that
would be eligible for cross-margining,
including product specifications or
criteria that would be used to define
eligible products;
(ii) Analysis of the risk characteristics
of the eligible products;
(iii) Analysis of the liquidity of the
respective markets for the eligible
products, including the ability of
clearing members and the derivatives
clearing organization to offset or
mitigate the risk of such products in a
timely manner and proposed means for
addressing insufficient liquidity;
(iv) Analysis of the availability of
reliable prices for each of the eligible
products;
(v) Financial and operational
requirements that would apply to
clearing members participating in the
program;
(vi) A description and analysis of the
margin methodology that would be used
to calculate initial margin requirements,
including:
(A) Any margin reduction applied to
correlated positions; and
(B) Information regarding the
correlations between eligible products,
including the stability of the
relationship among the eligible products
and the potential impact a change in the
correlations could have on setting initial
margin requirements;
(vii) Procedures the derivatives
clearing organization would follow in
the event of a clearing member default,
including any loss-sharing
arrangements;
(viii) A description of the
arrangements for obtaining daily
position data with respect to products in
the account;
(ix) Whether funds to support the
cross-margined positions will be
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maintained together in one account or
in separate accounts at each
participating clearing organization; and
(x) A copy of the agreement between
the clearing organizations participating
in the cross-margining program.
(2) The Commission may request
additional information in support of a
rule submission filed under this
paragraph (i), and may approve such
rules in accordance with § 40.5 of this
chapter.
■ 15. Revise § 39.15 to read as follows:
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§ 39.15
Treatment of funds.
(a) Required standards and
procedures. A derivatives clearing
organization shall establish standards
and procedures that are designed to
protect and ensure the safety of funds
and assets belonging to clearing
members and their customers.
(b) Customer funds—(1) Segregation.
A derivatives clearing organization shall
comply with the applicable segregation
requirements of section 4d of the Act
and Commission regulations in this
part, or any other applicable
Commission regulation in this chapter
or order requiring that customer funds
and assets, including money, securities,
and property, be segregated, set aside, or
held in a separate account.
(2) Commingling—(i) Cleared swaps
account. In order for a derivatives
clearing organization and its clearing
members to commingle customer
positions in futures, options, foreign
futures, foreign options, and swaps, or
any combination thereof, and any
money, securities, or property received
to margin, guarantee or secure such
positions, in an account subject to the
requirements of section 4d(f) of the Act,
the derivatives clearing organization
shall file rules for Commission approval
pursuant to § 40.5 of this chapter. Such
rule submission shall include, at a
minimum, the following:
(A) Identification of the products that
would be commingled, including
product specifications or the criteria
that would be used to define eligible
products;
(B) Analysis of the risk characteristics
of the eligible products;
(C) Identification of whether the
swaps would be executed bilaterally
and/or executed on a designated
contract market and/or a swap
execution facility;
(D) Analysis of the liquidity of the
respective markets for the eligible
products, the ability of clearing
members and the derivatives clearing
organization to offset or mitigate the risk
of such eligible products in a timely
manner, without compromising the
financial integrity of the account, and,
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as appropriate, proposed means for
addressing insufficient liquidity;
(E) Analysis of availability of reliable
prices for each of the eligible products;
(F) A description of the financial,
operational, and managerial standards
or requirements for clearing members
that would be permitted to commingle
eligible products;
(G) A description of the systems and
procedures that would be used by the
derivatives clearing organization to
oversee such clearing members’ risk
management of any such commingled
positions;
(H) A description of the financial
resources of the derivatives clearing
organization, including the composition
and availability of a guaranty fund with
respect to the eligible products that
would be commingled;
(I) A description and analysis of the
margin methodology that would be
applied to the commingled eligible
products, including any margin
reduction applied to correlated
positions, and any applicable margin
rules with respect to both clearing
members and customers;
(J) An analysis of the ability of the
derivatives clearing organization to
manage a potential default with respect
to any of the eligible products that
would be commingled;
(K) A discussion of the procedures
that the derivatives clearing
organization would follow if a clearing
member defaulted, and the procedures
that a clearing member would follow if
a customer defaulted, with respect to
any of the commingled eligible products
in the account; and
(L) A description of the arrangements
for obtaining daily position data with
respect to eligible products in the
account.
(ii) Futures account. In order for a
derivatives clearing organization and its
clearing members to commingle
customer positions in futures, options,
foreign futures, foreign options, and
swaps, or any combination thereof, and
any money, securities, or property
received to margin, guarantee or secure
such positions, in an account subject to
the requirements of section 4d(a) of the
Act, the derivatives clearing
organization shall file rules for
Commission approval pursuant to § 40.5
of this chapter. Such rule submission
shall include, at a minimum, the
information required under paragraph
(b)(2)(i) of this section.
(iii) Commission action. The
Commission may request additional
information in support of a rule
submission filed under paragraph
(b)(2)(i) or (ii) of this section, and may
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approve such rules in accordance with
§ 40.5 of this chapter.
(c) Holding of funds and assets. A
derivatives clearing organization shall
hold funds and assets belonging to
clearing members and their customers
in a manner which minimizes the risk
of loss or of delay in the access by the
derivatives clearing organization to such
funds and assets.
(d) Transfer of customer positions. A
derivatives clearing organization shall
have rules providing that the derivatives
clearing organization will promptly
transfer all or a portion of a customer’s
portfolio of positions, and related funds
as necessary, from the carrying clearing
member of the derivatives clearing
organization to another clearing member
of the derivatives clearing organization,
without requiring the close-out and rebooking of the positions prior to the
requested transfer, subject to the
following conditions:
(1) The customer has instructed the
carrying clearing member to make the
transfer;
(2) The customer is not currently in
default to the carrying clearing member;
(3) The transferred positions will have
appropriate margin at the receiving
clearing member;
(4) Any remaining positions will have
appropriate margin at the carrying
clearing member; and
(5) The receiving clearing member has
consented to the transfer.
(e) Permitted investments. Funds and
assets belonging to clearing members
and their customers that are invested by
a derivatives clearing organization shall
be held in instruments with minimal
credit, market, and liquidity risks. Any
investment of customer funds or assets,
including cleared swaps customer
collateral, as defined in § 22.1 of this
chapter, by a derivatives clearing
organization shall comply with § 1.25 of
this chapter.
■ 16. Revise § 39.16 to read as follows:
§ 39.16
Default rules and procedures.
(a) General. A derivatives clearing
organization shall have rules and
procedures designed to allow for the
efficient, fair, and safe management of
events during which clearing members
become insolvent or default on the
obligations of such clearing members to
the derivatives clearing organization.
(b) Default management plan. A
derivatives clearing organization shall
maintain a current written default
management plan that delineates the
roles and responsibilities of its board of
directors, its risk management
committee, any other committee that a
derivatives clearing organization may
have that has responsibilities for default
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management, and the derivatives
clearing organization’s management, in
addressing a default, including any
necessary coordination with, or
notification of, other entities and
regulators. Such plan shall address any
differences in procedures with respect
to highly liquid products and less liquid
products. A derivatives clearing
organization shall conduct and
document a test of its default
management plan at least on an annual
basis. The derivatives clearing
organization shall include clearing
members in a test of its default
management plan at least on an annual
basis.
(c) Default procedures. (1) A
derivatives clearing organization shall
have procedures that would permit the
derivatives clearing organization to take
timely action to contain losses and
liquidity pressures and to continue
meeting its obligations in the event of a
default on the obligations of a clearing
member to the derivatives clearing
organization. The derivatives clearing
organization shall have a default
committee that would be convened in
the event of a default involving
substantial or complex positions to help
identify market issues with any action
the derivatives clearing organization is
considering. The default committee
shall include clearing members and may
include other participants to help the
derivatives clearing organization
efficiently manage the house or
customer positions of the defaulting
clearing member.
(2) A derivatives clearing organization
shall have rules that set forth its default
procedures, including:
(i) The derivatives clearing
organization’s definition of a default;
(ii) The actions that the derivatives
clearing organization may take upon a
default, which shall include immediate
public notice of a declaration of default
on its website and the prompt transfer,
liquidation, or hedging of the customer
or house positions of the defaulting
clearing member, as applicable, and
which may include, in the discretion of
the derivatives clearing organization,
the auctioning or allocation of such
positions to other clearing members;
(iii) Any obligations that the
derivatives clearing organization
imposes on its clearing members to
participate in auctions, or to accept
allocations, of the customer or house
positions of the defaulting clearing
member, provided that:
(A) The derivatives clearing
organization shall permit a clearing
member to outsource to a qualified third
party, authority to act in the clearing
member’s place in any auction, subject
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to appropriate safeguards imposed by
the derivatives clearing organization;
(B) The derivatives clearing
organization shall permit a clearing
member to outsource to a qualified third
party, authority to act in the clearing
member’s place in any allocations,
subject to appropriate safeguards
imposed by the derivatives clearing
organization; and
(C) The derivatives clearing
organization shall not require a clearing
member to bid for a portion of, or accept
an allocation of, the defaulting clearing
member’s positions that is not
proportional to the size of the bidding
or accepting clearing member’s
positions in the same product class at
the derivatives clearing organization, as
measured by the clearing initial margin
requirement for those positions;
(iv) The sequence in which the funds
and assets of the defaulting clearing
member and its customers and the
financial resources maintained by the
derivatives clearing organization would
be applied in the event of a default;
(v) A provision that the funds and
assets of a defaulting clearing member’s
customers shall not be applied to cover
losses with respect to a house default;
and
(vi) A provision that the excess house
funds and assets of a defaulting clearing
member shall be applied to cover losses
with respect to a customer default, if the
relevant customer funds and assets are
insufficient to cover the shortfall.
(3) A derivatives clearing organization
shall make its default rules publicly
available as provided in § 39.21.
(d) Insolvency of a clearing member.
(1) A derivatives clearing organization
shall have rules that require a clearing
member to provide prompt notice to the
derivatives clearing organization if it
becomes the subject of a bankruptcy
petition, receivership proceeding, or the
equivalent;
(2) No later than upon receipt of such
notice, a derivatives clearing
organization shall review the continuing
eligibility of the clearing member for
clearing membership; and
(3) No later than upon receipt of such
notice, a derivatives clearing
organization shall take any appropriate
action, in its discretion, with respect to
such clearing member or its house or
customer positions, including but not
limited to liquidation or transfer of
positions, suspension, or revocation of
clearing membership.
■ 17. Revise § 39.17 to read as follows:
§ 39.17
Rule enforcement.
(a) General. A derivatives clearing
organization shall:
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(1) Maintain adequate arrangements
and resources for the effective
monitoring and enforcement of
compliance (by itself and its clearing
members) with the rules of the
derivatives clearing organization and
the resolution of disputes;
(2) Have the authority and ability to
discipline, limit, suspend, or terminate
the activities of a clearing member due
to a violation by the clearing member of
any rule of the derivatives clearing
organization; and
(3) Report to the Commission
regarding rule enforcement activities
and sanctions imposed against clearing
members as provided in paragraph (a)(2)
of this section, in accordance with
§ 39.19(c)(4)(xvii).
(b) Authority to enforce rules. The
board of directors of the derivatives
clearing organization may delegate
responsibility for compliance with the
requirements of paragraph (a) of this
section to an appropriate committee,
unless the responsibilities are otherwise
required to be carried out by the chief
compliance officer pursuant to the Act
or this part.
■ 18. Revise § 39.19 to read as follows:
§ 39.19
Reporting.
(a) General. A derivatives clearing
organization shall provide to the
Commission the information specified
in this section and any other
information that the Commission
determines to be necessary to conduct
oversight of the derivatives clearing
organization.
(b) Submission of reports—(1) General
requirement. A derivatives clearing
organization shall submit the
information required by this section to
the Commission in a format and manner
specified by the Commission.
(2) Certification. When making a
submission pursuant to this section, an
employee of the derivatives clearing
organization must certify that he or she
is duly authorized to make such a
submission on behalf of the derivatives
clearing organization.
(3) Time zones. Unless otherwise
specified by the Commission or its
designee, any stated time in this section
is Central time for information
concerning derivatives clearing
organizations located in that time zone,
and Eastern time for information
concerning all other derivatives clearing
organizations.
(c) Reporting requirements. Each
registered derivatives clearing
organization shall provide to the
Commission or other person as may be
required or permitted by this paragraph
(c) the information specified as follows:
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(1) Daily reporting. (i) A derivatives
clearing organization shall compile as of
the end of each trading day, and submit
to the Commission by 10:00 a.m. on the
next business day, a report containing
the following information related to all
positions other than fully-collateralized
positions:
(A) Initial margin requirements and
initial margin on deposit for each
clearing member, by house origin and
by each customer origin, and by each
individual customer account;
(B) Daily variation margin, separately
listing the mark-to-market amount
collected from or paid to each clearing
member, by house origin and by each
customer origin, and by each individual
customer account;
(C) All other daily cash flows relating
to clearing and settlement including, but
not limited to, option premiums and
payments related to swaps such as
coupon amounts, collected from or paid
to each clearing member, by house
origin and by each customer origin, and
by each individual customer account;
and
(D) End-of-day positions, including as
appropriate the risk sensitivities and
valuation data for such positions, for
each clearing member, by house origin
and by each customer origin, and by
each individual customer account. The
derivatives clearing organization shall
identify each individual customer
account using both a legal entity
identifier and any internally-generated
identifier, where applicable, within
each customer origin for each clearing
member.
(ii) The report shall contain the
information required by paragraphs
(c)(1)(i)(A) through (D) of this section
for:
(A) All futures positions, and options
positions, as applicable;
(B) All swaps positions; and
(C) All securities positions that are:
(1) Held in a customer account subject
to section 4d of the Act; or
(2) Subject to a cross-margining
agreement.
(2) Quarterly reporting. A derivatives
clearing organization shall provide to
the Commission each fiscal quarter, or
at any time upon Commission request,
a report of the derivatives clearing
organization’s financial resources as
required by § 39.11(f)(1).
(3) Annual reporting. A derivatives
clearing organization shall provide to
the Commission each year:
(i) The annual report of the chief
compliance officer required by § 39.10;
and
(ii) Audited year-end financial
statements of the derivatives clearing
organization as required by § 39.11(f)(2).
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(iii) [Reserved]
(iv) The reports required by this
paragraph (c)(3) shall be filed not later
than 90 days after the end of the
derivatives clearing organization’s fiscal
year, or at such later time as the
Commission may permit, in its
discretion, upon request by the
derivatives clearing organization.
(4) Event specific reporting—(i)
Decrease in financial resources. If there
is a decrease of 25 percent or more in
the total value of the financial resources
available to satisfy the requirements
under § 39.11(a)(1) or § 39.33(a), as
applicable, either from the last quarterly
report submitted under § 39.11(f) or
from the value as of the close of the
previous business day, a derivatives
clearing organization shall report such
decrease to the Commission no later
than one business day following the day
the 25 percent threshold was reached.
The report shall include:
(A) The total value of the financial
resources as of the close of business the
day the 25 percent threshold was
reached;
(B) If reporting a decrease in value
from the previous business day, the total
value of the financial resources
immediately prior to the 25 percent
decline;
(C) A breakdown of the value of each
financial resource reported in each of
paragraphs (c)(4)(i)(A) and (B) of this
section, calculated in accordance with
the requirements of § 39.11(d) or
§ 39.33(b), as applicable, including the
value of each individual clearing
member’s guaranty fund deposit if the
derivatives clearing organization reports
guaranty fund deposits as a financial
resource; and
(D) A detailed explanation for the
decrease.
(ii) Decrease in liquidity resources. If
there is a decrease of 25 percent or more
in the total value of the liquidity
resources available to satisfy the
requirements under § 39.11(e) or
§ 39.33(c), as applicable, either from the
last quarterly report submitted under
§ 39.11(f) or from the value as of the
close of the previous business day, a
derivatives clearing organization shall
report such decrease to the Commission
no later than one business day following
the day the 25 percent threshold was
reached. The report shall include:
(A) The total value of the liquidity
resources as of the close of business the
day the 25 percent threshold was
reached;
(B) If reporting a decrease in value
from the previous business day, the total
value of the liquidity resources
immediately prior to the 25 percent
decline;
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(C) A breakdown of the value of each
liquidity resource reported in each of
paragraphs (c)(4)(ii)(A) and (B) of this
section, calculated in accordance with
the requirements of § 39.11(e) or
§ 39.33(c), as applicable, including the
value of each individual clearing
member’s guaranty fund deposit if the
derivatives clearing organization reports
guaranty fund deposits as a liquidity
resource; and
(D) A detailed explanation for the
decrease.
(iii) Decrease in ownership equity. A
derivatives clearing organization shall
report to the Commission no later than
two business days prior to an event
which the derivatives clearing
organization knows or reasonably
should know will cause a decrease of 20
percent or more in ownership equity
from the last reported ownership equity
balance as reported on a quarterly or
audited financial statement required to
be submitted by paragraph (c)(2) or
(c)(3)(ii), respectively, of this section;
but in any event no later than two
business days after such decrease in
ownership equity for events that caused
the decrease about which the
derivatives clearing organization did not
know and reasonably could not have
known prior to the event. The report
shall include:
(A) Pro forma financial statements
reflecting the derivatives clearing
organization’s estimated future financial
condition following the anticipated
decrease for reports submitted prior to
the anticipated decrease and current
financial statements for reports
submitted after such a decrease; and
(B) A detailed explanation for the
decrease or anticipated decrease in the
balance.
(iv) Six-month liquid asset
requirement. A derivatives clearing
organization shall notify the
Commission immediately when the
derivatives clearing organization knows
or reasonably should know of a deficit
in the six-month liquid asset
requirement of § 39.11(e)(2).
(v) Change in current assets. A
derivatives clearing organization shall
notify the Commission no later than two
business days after the derivatives
clearing organization’s current liabilities
exceed its current assets. The notice
shall include a balance sheet that
reflects the derivatives clearing
organization’s current assets and current
liabilities and an explanation as to the
reason for the negative balance.
(vi) Request to clearing member to
reduce its positions. A derivatives
clearing organization shall notify the
Commission immediately of a request
by the derivatives clearing organization
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to one of its clearing members to reduce
the clearing member’s positions. The
notice shall include:
(A) The name of the clearing member;
(B) The time the clearing member was
contacted;
(C) The number of positions for
futures and options, and for swaps, the
number of outstanding trades and
notional amount, by which the
derivatives clearing organization
requested the reduction;
(D) All products that are the subject
of the request; and
(E) The reason for the request.
(vii) Determination to transfer or
liquidate positions. A derivatives
clearing organization shall notify the
Commission immediately of a
determination by the derivatives
clearing organization that a position it
carries for one of its clearing members
must be liquidated immediately or
transferred immediately, or that the
trading of any account of a clearing
member shall be only for the purpose of
liquidation because that clearing
member has failed to meet an initial or
variation margin call or has failed to
fulfill any other financial obligation to
the derivatives clearing organization.
The notice shall include:
(A) The name of the clearing member;
(B) The time the clearing member was
contacted;
(C) The products that are subject to
the determination;
(D) The number of positions for
futures and options, and for swaps, the
number of outstanding trades and
notional amount, that are subject to the
determination; and
(E) The reason for the determination.
(viii) Default of a clearing member. A
derivatives clearing organization shall
notify the Commission immediately of
the default of a clearing member. An
event of default shall be determined in
accordance with the rules of the
derivatives clearing organization. The
notice of default shall include:
(A) The name of the clearing member;
(B) The products the clearing member
defaulted upon;
(C) The number of positions for
futures and options, and for swaps, the
number of outstanding trades and
notional amount, the clearing member
defaulted upon; and
(D) The amount of the financial
obligation.
(ix) Change in ownership or corporate
or organizational structure—(A)
Reporting requirement. A derivatives
clearing organization shall report to the
Commission any anticipated change in
the ownership or corporate or
organizational structure of the
derivatives clearing organization or its
parent(s) that would:
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(1) Result in at least a 10 percent
change of ownership of the derivatives
clearing organization;
(2) Create a new subsidiary or
eliminate a current subsidiary of the
derivatives clearing organization; or
(3) Result in the transfer of all or
substantially all of the assets of the
derivatives clearing organization to
another legal entity.
(B) Required information. The report
shall include: A chart outlining the new
ownership or corporate or
organizational structure; a brief
description of the purpose and impact
of the change; and any relevant
agreements effecting the change and
corporate documents such as articles of
incorporation and bylaws.
(C) Time of report. The report shall be
submitted to the Commission no later
than three months prior to the
anticipated change, provided that the
derivatives clearing organization may
report the anticipated change to the
Commission later than three months
prior to the anticipated change if the
derivatives clearing organization does
not know and reasonably could not have
known of the anticipated change three
months prior to the anticipated change.
In such event, the derivatives clearing
organization shall immediately report
such change to the Commission as soon
as it knows of such change.
(D) Confirmation of change report.
The derivatives clearing organization
shall report to the Commission the
consummation of the change no later
than two business days following the
effective date of the change.
(x) Change in key personnel. A
derivatives clearing organization shall
report to the Commission no later than
two business days following the
departure or addition of persons who
are key personnel as defined in § 39.2.
The report shall include, as applicable,
the name and contact information of the
person who will assume the duties of
the position permanently or the person
who will assume the duties on a
temporary basis until a permanent
replacement fills the position.
(xi) Change in legal name. A
derivatives clearing organization shall
report to the Commission no later than
two business days following a legal
name change of the derivatives clearing
organization.
(xii) Change in credit facility funding
arrangement. A derivatives clearing
organization shall report to the
Commission no later than one business
day after the derivatives clearing
organization changes a credit facility
funding arrangement it has in place, or
is notified that such arrangement has
changed, including but not limited to a
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change in lender, change in the size of
the facility, change in expiration date, or
any other material changes or
conditions.
(xiii) Change in liquidity funding
arrangement. A derivatives clearing
organization shall report to the
Commission no later than one business
day after the derivatives clearing
organization changes a liquidity funding
arrangement it has in place, or is
notified that such arrangement has
changed, including but not limited to a
change in provider, change in the size
of the facility, change in expiration date,
or any other material changes or
conditions.
(xiv) Change in settlement bank
arrangements. A derivatives clearing
organization shall report to the
Commission no later than one business
day after any change in the derivatives
clearing organization’s arrangements
with any settlement bank used by the
derivatives clearing organization or
approved for use by the derivatives
clearing organization’s clearing
members.
(xv) Settlement bank issues. A
derivatives clearing organization shall
report to the Commission no later than
one business day after any material
issues or concerns arise regarding the
performance, stability, liquidity, or
financial resources of any settlement
bank used by the derivatives clearing
organization or approved for use by the
derivatives clearing organization’s
clearing members.
(xvi) Change in depositories for
customer funds. A derivatives clearing
organization shall report to the
Commission no later than one business
day after any change in the derivatives
clearing organization’s arrangements
with any depository of customer funds.
(xvii) Sanctions against a clearing
member. A derivatives clearing
organization shall provide notice to the
Commission no later than two business
days after the derivatives clearing
organization imposes sanctions against a
clearing member.
(xviii) Financial condition and events.
A derivatives clearing organization shall
provide to the Commission immediate
notice after the derivatives clearing
organization knows or reasonably
should have known of:
(A) The institution of any legal
proceedings which may have a material
adverse financial impact on the
derivatives clearing organization;
(B) Any event, circumstance or
situation that materially impedes the
derivatives clearing organization’s
ability to comply with this part and is
not otherwise required to be reported
under this section; or
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(C) A material adverse change in the
financial condition of any clearing
member that is not otherwise required
to be reported under this section.
(xix) Financial statements material
inadequacies. A derivatives clearing
organization shall provide notice to the
Commission within 24 hours if the
derivatives clearing organization
discovers or is notified by an
independent public accountant of the
existence of any material inadequacy in
a financial statement, and within 48
hours after giving such notice provide a
written report stating what steps have
been and are being taken to correct the
material inadequacy.
(xx) Change in fiscal year. A
derivatives clearing organization shall
provide to the Commission immediate
notice of any change to the start and end
dates of its fiscal year.
(xxi) Change in independent
accounting firm. A derivatives clearing
organization shall report to the
Commission no later than one business
day after any change in the derivatives
clearing organization’s independent
public accounting firm. The report shall
include the date of such change, the
name and contact information of the
new firm, and the reason for the change.
(xxii) Major decision of the board of
directors. A derivatives clearing
organization shall report to the
Commission any major decision of the
derivatives clearing organization’s board
of directors as required by
§ 39.24(a)(3)(i).
(xxiii) System safeguards. A
derivatives clearing organization shall
report to the Commission:
(A) Exceptional events as required by
§ 39.18(g); or
(B) Planned changes as required by
§ 39.18(h).
(xxiv) Margin model issues. A
derivatives clearing organization shall
report to the Commission no later than
one business day after any issue occurs
with a DCO’s margin model, including
margin models for cross-margined
portfolios, that affects the DCO’s ability
to calculate or collect initial margin or
variation margin.
(xxv) Recovery and wind-down plans.
A derivatives clearing organization that
is required to maintain recovery and
wind-down plans pursuant to § 39.39(b)
shall submit its plans to the
Commission no later than the date on
which the derivatives clearing
organization is required to have the
plans. A derivatives clearing
organization that is not required to
maintain recovery and wind-down
plans pursuant to § 39.39(b), but which
nonetheless maintains such plans, may
choose to submit its plans to the
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Commission. A derivatives clearing
organization that has submitted its
recovery and wind-down plans to the
Commission shall, upon making any
revisions to the plans, submit the
revised plans to the Commission along
with a description of the changes and
the reason for those changes.
(xxvi) New product accepted for
clearing. A derivatives clearing
organization shall provide notice to the
Commission no later than 30 calendar
days prior to accepting a new product
for clearing. The notice shall include:
(A) A brief description of the new
product;
(B) The date on which the derivatives
clearing organization intends to begin
accepting the new product for clearing;
(C) A statement as to whether the new
product will require the derivatives
clearing organization to submit any rule
changes pursuant to § 40.5 or § 40.6, and
§ 40.10, as applicable, of this chapter;
(D) A statement as to whether the
derivatives clearing organization has
informed, or intends to inform, its
clearing members and/or the general
public of the new product and, if
written notice was given, a web address
for or copy of such notice; and
(E) An explanation of any substantive
opposing views received and how the
derivatives clearing organization
addressed such views or objections.
(5) Requested reporting. A derivatives
clearing organization shall provide upon
request by the Commission and within
the time specified in the request:
(i) Any information related to its
business as a clearing organization,
including information relating to trade
and clearing details.
(ii) A written demonstration,
containing supporting data, information
and documents, that the derivatives
clearing organization is in compliance
with one or more core principles and
relevant provisions of this part.
■ 19. In § 39.20, revise paragraphs (a)
introductory text and (b) to read as
follows:
§ 39.20
Recordkeeping.
(a) Requirement to maintain
information. A derivatives clearing
organization shall maintain records of
all activities related to its business as a
derivatives clearing organization. Such
records shall include, but are not
limited to, records of:
*
*
*
*
*
(b) Form and manner of maintaining
information—(1) General. The records
required to be maintained by this
chapter shall be maintained in
accordance with the provisions of § 1.31
of this chapter, for a period of not less
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than 5 years, except as provided in
paragraph (b)(2) of this section.
(2) Exception for swap data. A
derivatives clearing organization that
clears swaps must maintain swap data
in accordance with the requirements of
part 45 of this chapter.
■ 20. Revise § 39.21 to read as follows:
§ 39.21
Public information.
(a) General. A derivatives clearing
organization shall provide to market
participants sufficient information to
enable the market participants to
identify and evaluate accurately the
risks and costs associated with using the
services of the derivatives clearing
organization. In furtherance of the
objective in this paragraph (a), a
derivatives clearing organization shall
have clear and comprehensive rules and
procedures.
(b) Availability of information. A
derivatives clearing organization shall
make information concerning the rules
and the operating and default
procedures governing the clearing and
settlement systems of the derivatives
clearing organization available to market
participants.
(c) Public disclosure. A derivatives
clearing organization shall make the
following information readily available
to the general public, in a timely
manner, by posting such information on
the derivatives clearing organization’s
website, unless otherwise permitted by
the Commission:
(1) The terms and conditions of each
contract, agreement, and transaction
cleared and settled by the derivatives
clearing organization;
(2) Each clearing and other fee that
the derivatives clearing organization
charges its clearing members;
(3) Information concerning its marginsetting methodology;
(4) The size and composition of the
financial resource package available in
the event of a clearing member default,
updated as of the end of the most recent
fiscal quarter or upon Commission
request and posted concurrently with
submission of the report to the
Commission under § 39.11(f)(1)(i)(A);
(5) Daily settlement prices, volume,
and open interest for each contract,
agreement, or transaction cleared or
settled by the derivatives clearing
organization, posted no later than the
business day following the day to which
the information pertains;
(6) The derivatives clearing
organization’s rulebook, including rules
and procedures for defaults in
accordance with § 39.16;
(7) A current list of all clearing
members;
(8) A list of all swaps that the
derivatives clearing organization will
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accept for clearing that identifies which
swaps on the list are required to be
cleared, in accordance with § 50.3(a) of
this chapter; and
(9) Any other information that is
relevant to participation in the clearing
and settlement activities of the
derivatives clearing organization.
■ 21. Revise § 39.22 to read as follows:
§ 39.22
Information sharing.
A derivatives clearing organization
shall enter into, and abide by the terms
of, each appropriate and applicable
domestic and international informationsharing agreement, and shall use
relevant information obtained from each
such agreement in carrying out the risk
management program of the derivatives
clearing organization.
■ 22. Add § 39.24 to read as follows:
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§ 39.24
Governance.
(a) General. (1) A derivatives clearing
organization shall have governance
arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety
and efficiency of the derivatives clearing
organization; and
(iv) Explicitly support the stability of
the broader financial system and other
relevant public interest considerations
of clearing members, customers of
clearing members, and other relevant
stakeholders.
(2) The board of directors shall make
certain that the derivatives clearing
organization’s design, rules, overall
strategy, and major decisions
appropriately reflect the legitimate
interests of clearing members, customers
of clearing members, and other relevant
stakeholders.
(3) To the extent consistent with other
statutory and regulatory requirements
on confidentiality and disclosure:
(i) Major decisions of the board of
directors shall be clearly disclosed to
clearing members, other relevant
stakeholders, and to the Commission;
and
(ii) Major decisions of the board of
directors having a broad market impact
shall be clearly disclosed to the public.
(b) Governance arrangement
requirements. A derivatives clearing
organization shall have governance
arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other
statutory and regulatory requirements
on confidentiality and disclosure, are
disclosed, as appropriate, to the
Commission, other relevant authorities,
clearing members, customers of clearing
members, owners of the derivatives
clearing organization, and to the public;
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(3) Describe the structure pursuant to
which the board of directors,
committees, and management operate;
(4) Include clear and direct lines of
responsibility and accountability;
(5) Clearly specify the roles and
responsibilities of the board of directors
and its committees, including the
establishment of a clear and
documented risk management
framework;
(6) Clearly specify the roles and
responsibilities of management;
(7) Describe procedures pursuant to
which the board of directors oversees
the chief risk officer, risk management
committee, and material risk decisions;
(8) Provide risk management and
internal control personnel with
sufficient independence, authority,
resources, and access to the board of
directors so that the operations of the
derivatives clearing organization are
consistent with the risk management
framework established by the board of
directors;
(9) Assign responsibility and
accountability for risk decisions,
including in crises and emergencies;
and
(10) Assign responsibility for
implementing the:
(i) Default rules and procedures
required by §§ 39.16 and 39.35, as
applicable;
(ii) System safeguard rules and
procedures required by §§ 39.18 and
39.34, as applicable; and
(iii) Recovery and wind-down plans
required by § 39.39, as applicable.
(c) Fitness standards. (1) A derivatives
clearing organization shall establish and
enforce appropriate fitness standards
for:
(i) Directors;
(ii) Members of any disciplinary
committee;
(iii) Members of the derivatives
clearing organization;
(iv) Any other individual or entity
with direct access to the settlement or
clearing activities of the derivatives
clearing organization; and
(v) Any other party affiliated with any
individual or entity described in this
paragraph.
(2) A derivatives clearing organization
shall maintain policies to make certain
that:
(i) The board of directors consists of
suitable individuals having appropriate
skills and incentives;
(ii) The performance of the board of
directors and the performance of
individual directors is reviewed on a
regular basis; and
(iii) Managers have the appropriate
experience, skills, and integrity
necessary to discharge operational and
risk management responsibilities.
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■
23. Add § 39.25 to read as follows:
§ 39.25
Conflicts of interest.
A derivatives clearing organization
shall:
(a) Establish and enforce rules to
minimize conflicts of interest in the
decision-making process of the
derivatives clearing organization;
(b) Establish a process for resolving
such conflicts of interest; and
(c) Describe procedures for
identifying, addressing, and managing
conflicts of interest involving members
of the board of directors.
■ 24. Add § 39.26 to read as follows:
§ 39.26
Composition of governing boards.
A derivatives clearing organization
shall ensure that the composition of the
governing board or board-level
committee of the derivatives clearing
organization includes market
participants and individuals who are
not executives, officers, or employees of
the derivatives clearing organization or
an affiliate thereof. For purposes of this
section, ‘‘market participant’’ means any
clearing member of the derivatives
clearing organization or customer of a
clearing member, or an employee,
officer, or director of such an entity.
■ 25. In § 39.27, revise paragraph (c) to
read as follows:
§ 39.27
Legal risk considerations.
*
*
*
*
*
(c) Conflict of laws. If a derivatives
clearing organization provides clearing
services outside the United States:
(1) The derivatives clearing
organization shall identify and address
any material conflict of law issues. The
derivatives clearing organization’s
contractual agreements shall specify a
choice of law.
(2) The derivatives clearing
organization shall be able to
demonstrate the enforceability of its
choice of law in relevant jurisdictions
and that its rules, procedures, and
contracts are enforceable in all relevant
jurisdictions.
(3) The derivatives clearing
organization shall ensure on an ongoing
basis that the memorandum required in
paragraph (b) of Exhibit R to appendix
A to this part is accurate and up to date
and shall submit an updated
memorandum to the Commission
promptly following all material changes
to the analysis or content contained in
the memorandum.
§ 39.32
[Removed and Reserved]
26. Remove and reserve § 39.32.
27. In § 39.33, revise paragraphs (a)(1)
and (c)(1)(i), and add paragraph (d)(5) to
read as follows:
■
■
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§ 39.33 Financial resources requirements
for systemically important derivatives
clearing organizations and subpart C
derivatives clearing organizations.
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(a) * * *
(1) Notwithstanding the requirements
of § 39.11(a)(1), each systemically
important derivatives clearing
organization and subpart C derivatives
clearing organization that, in either case,
is systemically important in multiple
jurisdictions or is involved in activities
with a more complex risk profile shall
maintain financial resources sufficient
to enable it to meet its financial
obligations to its clearing members
notwithstanding a default by the two
clearing members creating the largest
combined financial exposure to the
derivatives clearing organization in
extreme but plausible market
conditions.
*
*
*
*
*
(c) * * *
(1) * * *
(i) Notwithstanding the provisions of
§ 39.11(e)(1)(ii), each systemically
important derivatives clearing
organization and subpart C derivatives
clearing organization shall maintain
eligible liquidity resources, in all
relevant currencies, that, at a minimum,
will enable it to meet its intraday, sameday, and multiday obligations to
perform settlements, as defined in
§ 39.14(a)(1), with a high degree of
confidence under a wide range of stress
scenarios that should include, but not
be limited to, a default by the clearing
member creating the largest aggregate
liquidity obligation for the systemically
important derivatives clearing
organization or subpart C derivatives
clearing organization in extreme but
plausible market conditions.
*
*
*
*
*
(d) * * *
(5) A systemically important
derivatives clearing organization with
access to accounts and services at a
Federal Reserve Bank, pursuant to
section 806(a) of the Dodd-Frank Act, 12
U.S.C. 5465(a), shall use such accounts
and services where practical.
*
*
*
*
*
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28. In § 39.36, revise paragraphs
(a)(5)(ii), (a)(6), (b)(2)(ii), (d) and (e) to
read as follows:
■
§ 39.36 Risk management for systemically
important derivatives clearing organizations
and subpart C derivatives clearing
organizations.
(a) * * *
(5) * * *
(ii) Using the results to assess the
adequacy of, and to adjust, its total
amount of financial resources; and
(6) Use the results of stress tests to
support compliance with the minimum
financial resources requirement set forth
in § 39.11(a)(1) or § 39.33(a), as
applicable.
(b) * * *
(2) * * *
(ii) Testing of the ability of the models
or model components to react
appropriately using actual or
hypothetical datasets and assessing the
impact of different model parameter
settings.
*
*
*
*
*
(d) Margin model assessment. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
conduct, on at least an annual basis (or
more frequently if there are material
relevant market developments), an
assessment of the theoretical and
empirical properties of its margin model
for all products it clears.
(e) Independent validation. Each
systemically important derivatives
clearing organization and subpart C
derivatives clearing organization shall
perform, on an annual basis, a full
validation of its financial risk
management model and its liquidity risk
management model.
*
*
*
*
*
■ 29. In § 39.37, revise paragraphs (b)
and (c) to read as follows:
§ 39.37 Additional disclosure for
systemically important derivatives clearing
organizations and subpart C derivatives
clearing organizations.
*
*
*
*
*
(b)(1) Review and update its
responses disclosed as required by
paragraph (a) of this section at least
every two years and following material
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changes to the systemically important
derivatives clearing organization’s or
subpart C derivatives clearing
organization’s system or the
environment in which it operates. A
material change to the systemically
important derivatives clearing
organization’s or subpart C derivatives
clearing organization’s system or the
environment in which it operates is a
change that would significantly change
the accuracy and usefulness of the
existing responses; and
(2) Provide notice to the Commission
of updates to its responses required by
paragraph (b)(1) of this section
following material changes no later than
ten business days after the updates are
made. Such notice shall be
accompanied by a copy of the text of the
responses that shows all deletions and
additions made to the immediately
preceding version of the responses;
(c) Disclose, publicly and to the
Commission, relevant basic data on
transaction volume and values
consistent with the standards set forth
in the Public Quantitative Disclosure
Standards for Central Counterparties
published by the Committee on
Payments and Market Infrastructures
and the International Organization of
Securities Commissions;
*
*
*
*
*
■ 30. In § 39.39, revise paragraph (a)(2)
to read as follows:
§ 39.39 Recovery and wind-down for
systemically important derivatives clearing
organizations and subpart C derivatives
clearing organizations.
(a) * * *
(2) Wind-down means the actions of a
systemically important derivatives
clearing organization or subpart C
derivatives clearing organization to
effect the permanent cessation or sale or
transfer of one or more services.
*
*
*
*
*
■ 31. Revise appendix A to part 39 to
read as follows:
Appendix A to Part 39—Form DCO
Derivatives Clearing Organization
Application for Registration
BILLING CODE 6351–01–P
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OMB No. 3038-0076
COMMODITY FUTURES TRADING COMMISSION
FORM DCO
DERIVATIVES CLEARING ORGANIZATION
APPLICATION FOR REGISTRATION
GENERAL INSTRUCTIONS
Intentional misstatements or omissions of fact may constitute federal criminal violations (7 U.S.C. 13
and 18 U.S.C. 1001) or grounds for disqualification from registration.
DEFINITIONS
Unless the context requires otherwise, all terms used in this Form DCO have the same meaning as in the
Commodity Exchange Act ("Act"), and in the General Rules and Regulations of the Commodity Futures
Trading Commission ("Commission") thereunder. All references to Commission regulations are found at
17 CFR Ch. I.
For the purposes of this Form DCO, the tenn "Applicant" shall include any applicant for registration as a
derivatives clearing organization.
VerDate Sep<11>2014
1.
This Form DCO, which includes a Cover Sheet and required Exhibits (together, "Form DCO" or
"application"), is to be filed with the Commission by all applicants for registration as a derivatives
clearing organization, including applicants when amending a pending application, pursuant to Section
5b of the Act and the Commission's regulations thereunder. Upon the filing of an application for
registration or an amendment to an application in accordance with the instructions provided herein, the
Commission will publish notice of the filing and afford interested persons an opportunity to submit
written data, views and comments concerning such application. No application for registration will be
effective unless the Commission, by order, grants such registration.
2.
Individuals' names, except the executing signature, shall be given in full (Last Name, First Name,
Middle Name).
3.
With respect to the executing signature, it must be manually signed by a duly authorized representative
of the Applicant as follows: If the Fonn DCO is filed by a corporation, it must be signed in the name of
the corporation by a principal officer duly authorized; iffiled by a limited liability company, it must be
signed in the name of the limited liability company by a manager or member duly authorized to sign on
the limited liability company's behalf; if filed by a partnership, it must be signed in the name of the
partnership by a general partner duly authorized; if filed by an unincorporated organization or
association which is not a partnership, it must be signed in the name of such organization or
association by the managing agent, i.e., a duly authorized person who directs or manages or who
participates in the directing or managing of its affairs.
4.
If this Form DCO is being filed as an application for registration, all applicable items must be
answered in full. If any item or Exhibit is inapplicable, this response must be affirmatively indicated
by the designation "none," "not applicable," or "N/A," as appropriate.
5.
Under section 5b of the Act and the Commission's regulations thereunder, the Commission is
authorized to solicit the infonnation required to be supplied by this Fonn DCO from any Applicant
seeking registration as a derivatives clearing organization and from any registered derivatives clearing
organization. Disclosure by the Applicant of the infonnation specified in this Form DCO is mandatory
prior to the start of the processing of an application for registration as a derivatives clearing
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organization. The information provided in this Form DCO will be used for the principal purpose of
detennining whether the Commission should grant or deny registration to an Applicant.
The Commission may determine that additional information is required from the Applicant in
order to process its application. An Applicant is therefore encouraged to supplement this Form
DCO with any additional information that may he significant to its 011eration as a derivatives
clearing organization and to the Commission's review of its application. A Form DCO which is
not prepared and executed in compliance with applicable requirements and instructions may be
returned as not acceptable for filing. Acceptance of this Form DCO, however, shall not
constitute a finding that the Form DCO has been filed as required or that the information
submitted is true, current or complete.
6.
As provided in 17 CFR 39.3(a)(5), except in cases where the Applicant submits a request for
confidential treatment with the Secretary of the Commission pursuant to the Freedom of Information
Act and 17 CFR 145.9, information supplied in this application will be included routinely in the public
files of the Commission and will be available for inspection by any interested person.
APPLICATION AMENDMENTS
1.
17 CFR 39.3(a)(4) requires an Applicant to promptly amend its application if it discovers a material
omission or error in the application, or if there is a material change in the information contained in the
application, including any supplement or amendment thereto.
2.
Applicants, when filing this Form DCO for purposes of amending a pending application, must re-file
an entire Cover Sheet, amended if necessary and including an executing signature, and attach thereto
revised Exhibits or other materials marked to show changes, as applicable. The submission of an
amendment to a pending application represents that the remaining items and Exhibits that are not
amended remain true, current, and complete as previously filed.
WHERE TO FILE
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This Form DCO must be filed with the Commission in the format and manner specified by the
Commission.
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COMMODITY FUTURES TRADING COMMISSION
FORM DCO
DERIVATIVES CLEARING ORGANIZATION
APPLICATION FOR REGISTRATION
COVER SHEET
Exact name of Applicant as specified in charter
Address of principal executive offices
D
D
If this is an APPLICATION for registration, complete in full and check here.
Iftllis is an AMENDMENT to a pending application, list below all items that are being amended and
check here.
GENERAL INFORMATION
1.
Name under which business is or will be conducted, if different than name specified above (include
acronyms, if any):
2.
If name of derivatives clearing organization is being amended, state previous derivatives clearing
orgmlization nan1e:
3.
Additional contact information:
Website URL
4.
Main Phone Number
List of principal office(s) and address(es) where derivatives clearing organization activities are/will be
conducted:
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BUSINESS ORGANIZATION
5.
lf Applicant is a successor to a previously registered derivatives clearing organization, please complete
the following:
a.
Date of succession _ _ _ _ _ _ _ _ _ _ __
b.
Full name and address of predecessor registrant
Name
Street Address
City
6.
State
Country
Zip Code
Applicant is a:
D
Corporation
D
Partnership (specify whether general or limited)
D
Limited Liability Company
D
Other form of organization (specify) _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
7.
Date of formation: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __
8.
Jurisdiction of organization:
List all other jurisdictions in which Applicant is qualified to do business (including non-US
jurisdictions):
List all other regulatory licenses or registrations of Applicant (or exemptions from any licensing
requirement) including with non-US regulators:
9.
FEIN or other Tax ID#: _ _ _ _ _ _ __
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10. Fiscal YearEnd: _ _ _ _ _ _ _ _ __
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ADDITIONAL CONTACT INFORMATION
11. Provide contact information specifying name, title, phone numbers, mailing address and e-mail address
for the following individuals:
a.
The primary contact for questions and correspondence regarding the application
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
b.
The individual responsible for handling questions regarding the Applicant's financial
statements
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
c.
The individual responsible for serving as the Chief Risk Officer of the Applicant pursuant to
§ 39.13 of the Commission's regulations
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
d.
The individual responsible for serving as the Chief Compliance Officer of the Applicant
pursuant to § 39.10 of the Commission's regulations
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
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The individual responsible for serving as the chief legal officer of the Applicant
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Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
12. Outside Service Providers: Provide contact information specifying name, title, phone numbers,
mailing address and e-mail address for any outside service provider retained by the Applicant as
follows:
a.
Certified Public Accountant
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
b.
Legal Counsel
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
c.
Records Storage or Management
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
d.
Business Continuity/Disaster Recovery
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
e.
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Professional consultants providing services related to this application
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Name and Title
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e.
Professional consultants providing seiVices related to this application
Name and Title
Office Phone Number
Mobile Phone Number
Mailing address
E-mail Address
13. Applicant agrees and consents tl1at the notice of any proceeding before the Commission in connection
with this application may be given by sending such notice by certified mail to the person named below
at the address given.
Print Name and Title
Street Address
City
State
Country
Zip Code
SIGNATURE/REPRESENTATION
14. Applicant has duly caused this application to be signed on its behalf by its duly authorized
day of
, 20
representative as of the
Applicant and the undersigned each represent hereby that, to the best of their knowledge, all
information contained herein is tme, current and complete in all material respects. Tt is understood that
all required items and Exhibits are considered integral parts of this Form DCO and that the submission
of any amendment represents that all unamended items and Exhibits remain tme, current, and complete
as previously filed.
Name of Applicant
By: _______________________________________________________________
Manual Signature of Duly Authorized Person
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Print Name and Title of Signatory
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22287
COMMODITY FUTURES TRADING COMMISSION
FORM DCO
DERIVATIVES CLEARING ORGANIZATION
APPLICATION FOR REGISTRATION
EXHIBIT INSTRUCTIONS
1.
The following Exhibits must be filed with the Commission by each Applicant seeking
registration as a derivatives clearing organization pursuant to section 5b of the Act and the
Commission's regulations thereunder.
2.
The application must include a Table of Contents listing each Exhibit required by this Form
DCO and indicating which, if any, Exhibits are inapplicable. For any Exhibit that is
inapplicable, next to the Exhibit letter specify "none," "not applicable," or "N/A,'' as
appropriate.
3.
The Exhibils musl be labeled as specified in !his Fonn DCO. Tf any Exhibil requires
information that is related to, or may be duplicative of, information required to be included in
another Exhibit, Applicant may summarize such information and provide a cross-reference to
the Exhibit that contains the required information.
4.
If the information required in an Exhibit involves computerized programs or systems,
Applicant must submit descriptions of system test procedures, tests conducted, or test results
in sufficient detail to demonstrate the Applicant's ability to comply with the core principles
specified in section 5b of the Act and the Commission's regulations thereunder (the "Core
Principles"). With respect to each system test, Applicant must identify the methodology used
and provide the computer software, programs, and data necessary to enable the Col11111ission
lo duplicale each syslem lesl as il relales lo !he applicable Core Principle.
5.
If Applicant seeks confidential treatment of any Exhibit or a portion of any Exhibit, Applicant
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must mark such Exhibit with a prominent stamp, typed legend, or other suitable form of
notice on each page or portion of each page stating "Confidential Treatment Requested by
[Applicant]." If such marking is impractical under the circumstances, a cover sheet
prominently marked "Confidential Treatment Requested by [Applicant]" should be provided
for each group of records submitted for which confidential treatment is requested. Each of the
records transmitted in this matter shall be individually marked with an identifying number and
code so that they are separately identifiable. Applicant must also file a confidentiality request
with the Secretary of the Commission in accordance with 17 CFR 145.9.
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DESCRIPTION OF EXHIBITS
VerDate Sep<11>2014
•
Attach as Exhibit A-1, a regulatory compliance chart setting forth each Core Principle and providing
citations to the Applicant's relevant rules, policies, and procedures that address each Core Principle,
and a brief sunnnary of the manner in which Applicant will comply with each Core Principle.
•
Attach as Exhibit A-2, a copy of Applicant's rulebook. The rulebook must consist of all the rules
necessary to carry out Applicant's role as a derivatives clearing organization. Applicant must certify
that its rules constitute a binding agreement between Applicant and its clearing members and, in
addition to any sepamte clearing member agreements, establish rights and obligations between
Applicant and its clearing members.
•
Attach as Exhibit A-3, a narrative summary of Applicant's proposed clearing activities including (i)
the anticipated start date of clearing products (or, if Applicant is already clearing products, the
anticipated start date of activities for which Applicant is seeking an amendment to its registration), and
(ii) a description of the scope of Applicant's proposed clearing activities (e.g., clearing for a designated
contract market; clearing for a swap execution facility; clearing bilaterally executed products).
•
Attach as Exhibit A-4. a detailed business plan setting forth, at a minimum, the nature of and rationale
for Applicant's activities as a derivatives clearing organization, the context in which it is beginning or
expanding its activities, and the nature, terms, and conditions of the products it will clear.
•
Attach as Exhibit A-5, a list of the names of any person (i) who owns 5% or more of Applicant's stock
or other ownership or equity interests; or (ii) who, either directly or indirectly, through agreement or
otl1erwise, may control or direct the management or policies of Applicant. Provide as part of Exhibit
A-5 the full name and address of each such person, indicate the person's ownership percentage, and
attach a copy of the agreement or, if there is no agreement, an explanation of the basis upon which
such person exercises or may exercise such control or direction.
•
Attach as Exhibit A-6. a list of Applicant's current officers, directors, governors, general partners,
LLC managers, and members of all standing committees, as applicable, or persons performing
functions similar to any of the foregoing, indicating for each:
17:42 May 15, 2019
a.
Name and Title (with respect to a director, such title must include participation on
any commillee of Applicant):
b.
Dates of commencement and, if appropriate, termination of present term of office or
position:
c.
Length of time each such person has held the same office or position;
d.
Brief description of the business experience of each person over the last ten years;
e.
Any other current business affiliations in the financial services industry;
f.
If such person is not an employee of Applicant, list any compensation paid to the
person as a result of his or her position at Applicant. For a director, describe any
performance-based compensation;
g.
A certification for each such person that the individual would not be disqualified
under section Sa(2) of the Act or§ 1.63; and
h.
With respect to a director, indicate whether such director is an independent director,
and whether such director is a market participant, and tl1e basis for such a
determination as to the director's status.
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EXHIBIT A- GENERAL INFORMATION/COMPLIANCE
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22289
If another entity will operate or control the day -to-day business operations of the Applicant, attach for such
entity all of the items indicated in Exhibit A-6.
•
Attach as Exhibit A-7, a diagram of the entire corporate organizational structure of Applicant
including the legal name of all entities within the organizational structure and the applicable
percentage ownership among affiliated entities. Additionally, provide (i) a list of all jurisdictions in
which Applicant or its affiliated entities are doing business; (ii) the registration status of Applicant
and its affiliated entities, including pending applications or exemption requests and whether any
applications or exemptions have been denied (e.g., country, regulator, registration category, date of
registration or request for exemption, date of denial, if applicable); and (iii) the address for legal
service of process for Applicant (which cannot be a post office box) for each applicable jurisdiction.
•
Attach as Exhibit A-8, a copy of the constituent documents, articles of incorporation or association
with all amendments thereto, partnership or limited liability agreements, and existing bylaws,
operating agreement, or instruments corresponding thereto, of Applicant. Provide a certificate of
good standing or its equivalent for Applicant for each jurisdiction in which Applicant is doing
business, including any foreign jurisdiction, dated within one month of the date of the Form DCO.
•
Attach as Exhibit A-9, a brief description of any material pending legal proceeding(s) or
governmental investigation(s) to which Applicant or any of its affiliates is a party or is subject, or to
which any of its or their property is at issue. Include the name of the court or agency where the
proceeding(s) is pending, the date(s) instituted, the principal parties involved, a description of the
factual allegations in the complaint(s), the laws that were allegedly violated, and the relief sought.
Include similar information as to any such proceeding(s) or any investigation known to be
contemplated by any governmental agency.
•
If Applicant intends to use the services of an outside service provider (including services of its
clearing members or market participants), to enable Applicant to comply with any of the Core
Principles, Applicant must submit as Exhibit A-1 0 all agreements entered into or to be entered into
between Applicant and the outside service provider, and identify (1) the services that will be
provided; (2) the staff of the outside service provider who will provide the services (specifying (i) in
which department or unit of the outside service provider they are employed, (ii) title, and (iii) if
known, level of experlise); and (3) !he Core Principles addressed by such arrangemenl. Each
submitted agreement must include all attachments cited therein. If a submitted agreement is not final
and executed, the Applicant must submit evidence that constitutes reasonable assurance that such
services will be provided as soon as operations require.
•
Attach as Exhibit A-11, documentation that demonstrates compliance with the Chief Compliance
Officer ("CCO") requirements set forth in§ 39.10(c), including but not limited to:
a.
Evidence of the designation of an individual to serve as Applicant's CCO with full
responsibility and authority to develop and enforce appropriate compliance policies
and procedures;
b.
A description of the background and skills of the person designated as the CCO and
a certification that the individual would not be disqualified under section 8a(2) or
8a(3) of the Act;
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Identification of to whom the ceo reports (i.e., the senior officer of the derivatives
clearing organization, the senior officer responsible for the derivative clearing
organization's clearing activities, or the Board of Directors of the derivatives
clearing organization);
d.
Any plan of communication or regular or special meetings between the CCO and the
Board of Directors or senior officer as appropriate;
e.
A job description setting forth the CCO's duties;
f.
Procedures for the remediation of noncompliance issues; and
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g.
•
A copy of Applicant's written compliance policies and procedures (including a code
of ethics and conflict of interest policy).
Attach as Exhibit A-12, a description of Applicant's enterprise risk management program, and how
it complies with the requirements set forth in§ 39.10(d).
EXHIBIT B- FINANCIAL RESOURCES
•
Attach as Exhibit B, docmnents that demonstrate compliance with the financial resources
requirements set forth in~ 39.11 of the Commission's regulations, including but not limited to:
General- Provide as Exhibit B-1:
(1)
The most recent year-end audited financial statements of Applicant calculated
in accordance with U.S. generally accepted accounting principles ("U.S.
GAAP"), including the balance sheet, income statement, statement of cash
flows, notes to the financial statements, and an independent auditor's report
issued by a certified public accountant, dated as of the end of Applicant's last
fiscal year-end prior to the date of filing the Form DCO. If Applicant docs
not have its own year-end audited financial statements, it may submit the
audited financial statements of its direct parent company, dated as of the end
of the direct parent company's last fiscal year-end prior to the date of filing
the Form DCO. Applicant should be aware that once it is registered as a
derivatives clearing organization it must submit its own year-end audited
financial statements, as required by § 39.ll(f)(2)(i), and the cost of such audit
must be included in Applicant's calculation of its total projected operating
costs in Exhibit B-3, as described in paragraph c( 5) below;
(2)
If Applicant is unable to submit a copy of its own audited financial statements
or the audited financial statements of its direct parent company, as required by
paragraph a(l) above, Applicant must provide its year-end financial
statements calculated in accordance with U.S. GAAP, including the balance
sheet, income statement, statement of cash flows, and notes to the financial
statements, dated as of the end of Applicant's last fiscal year-end prior to the
date of filing the Form DCO. These year-end financial statements must be
accompanied by an independent accountant's review report issued by a
certified public accountant;
(3)
If the audited or reviewed financial statements submitted in accordance with
either paragraph a(l) or paragraph a(2) above are not dated as of the end of
Applicant's last fiscal quarter prior to the date of filing the Form DCO.
Applicant must also provide a set of Applicant's quarterly unaudited financial
statements, dated as of the end of Applicant's last fiscal quarter prior to the
date of filing the Fonn DCO;
(4)
If Applicant is incorporated or organiLed under the laws of any foreign
country, it may submit the financial statements described above prepared in
accordance with either U.S.GAAP or the International Financial Reporting
Standards ("IFRS") issued by the International Accounting Standards Board.
Applicant should be aware that once it is registered as a derivatives clearing
organization it must submit financial statements prepared in accordance with
U.S. GAAP or IFRS, as required by § 39.ll(f)(l) and (f)(2):
(5)
If Applicant is a start-up or will commence operations after it is registered as a
derivatives clearing organization, Applicant must submit a set of pro-forma
financial statements, including the balance sheet, income statement, and
statement of cash flows, dated as of the first month-end after Applicant's
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22291
expected start date. The set of pro-forma statements must include a narrative
description of how the estimates were determined;
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17:42 May 15, 2019
A narrative description of how Applicant will fund its financial resources
obligations on the first day of its operation as a registered derivatives clearing
organization; and
(7)
Applicant must complete the form that is used by registered derivatives
clearing organizations for quarterly reports under § 39.11(f)(l), as of the date
of the most recent financial statements provided in Exhibit B-1. If Applicant
is a start-up, Applicant must complete the form using estimated figures and
must provide a narrative description of how the estimates were determined.
The Division of Clearing and Risk will provide the current form to Applicant,
upon request.
Default Resources- Provide as Exhibit B-2:
(1)
A calculation of the financial resources needed to enable Applicant to meet its
requirements under§ 39.11(a)(1), as of the date of the most recent financial
statements provided in Exhibit B-1. Applicant must provide hypothetical
default scenarios designed to reflect a variety of market conditions, and the
assumptions and variables underlying the scenarios must be explained. All
results of the analysis must be included. This calculation requires a start-up
enterprise to estimate its largest anticipated financial exposure and explain the
basis for such estimate;
(2)
Evidence of unencumbered assets sufficient to satisfy§ 39.11(a)(1), as of the
date of the most recent financial statements provided in Exhibit B-1. For
example, this may be demonstrated by audited financial statements or a copy
of a bank balance statement(s), custodian statement(s), or statement(s) from
any other institution holding such assets for each type of financial resource. A
start-up enterprise may not make this demonstration through audited financial
statements. If relying on § 39.11 (b)( 1)(v), such other resources must be
thoroughly explained. If Applicant intends to use a committed line of credit
or similar facility to meet the liquidity requirement pursuant to
§ 39.11(e)(1)(iii), Applicant must provide a copy of the applicable credit
agreement(s). If relying on§ 39.11(b)(1)(i) and/or (v), Applicant cannot also
count these assets when demonstrating its compliance with its operating
resources requirement under § 39.11(a)(2) and Applicant must detail the
amounts or percentages of such assets that apply to each financial resource
requirement;
(3)
A demonstration that Applicant can perform the monthly calculations required
by§ 39.11(c)(1);
(4)
A demonstration that Applicant's financial resources are sufficiently liquid as
required by § 39.11(e)(1), as of the date of the most recent financial
statements provided in Exhibit B-1;
(5)
A demonstration of how Applicant will be able to maintain, at all times, the
level of resources required by§ 39.11(a)(1); and
(6)
A demonstration of how default resources financial information will be
updated and reported to clearing members and the public under § 39.21, and
to the Commission as required by § 39.11 (f)( 1) and § 39.19.
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b.
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c.
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Operating Resources- Provide as Exhibit B-3:
( l)
A calculation of the financial resources needed to enable Applicant to meet its
requirements under § 39.ll(a)(2), as of the date of the most recent financial
statements provided in Exhibit B-1;
(2)
Evidence of assets sufficient to satisfy the amount required under
§ 39.11 (a)(2), as of the dale of the most recent financial slalemenls provided
in Exhibit B-1. For example, this may be demonstrated by audited financial
statements or a copy of a bank balance statement(s), custodian statement(s), or
statement(s) from any other institution holding such assets, in the name of
Applicant, for each type of financial resource. A start-up enterprise may not
make this demonstration through audited financial statements. lf relying on
§ 39.ll(b)(2)(ii), such other resources must be thoroughly explained. lf
Applicant intends to use a committed line of credit or similar facility to meet
the liquidity requirement pursuant to§ 39.ll(e)(2), Applicant must provide a
copy of the applicable credit agreement(s). If relying on§ 39.ll(b)(2)(i) or
(ii), Applicant cannot also count these assets when demonstrating its
compliance with meeting its default resources requirement under
§ 39.ll(a)(l) and Applicant must detail the amounts or percentages of such
assets that apply to each financial resource requirement
(3)
A narrative statement demonstrating the adequacy of Applicant's physical
infrastructure to carry out business operations, which includes a principal
executive office (separate from any personal dwelling) with a street address
(not merely a post office box number). For its principal executive office and
other facilities Applicant plans to occupy in carrying out its functions as a
derivatives clearing organization, a description of the space (e.g., location and
square footage), use of the space (e.g., executive office, data center), and the
basis for Applicant's right to occupy the space (e.g., lease, agreement with
parent company to share leased space);
(4)
A narrative statement demonstrating the adequacy of the technological
systems necessary to carry out Applicant's business operations, including a
description of Applicant's information technology and telecommunications
systems and a timetable for full operability;
(5)
A calculation pursuant to § 39.ll(c)(2), including the total projected operating
costs for Applicant's first year of operation as a derivatives clearing
organization, calculated on a monthly basis with an explanation of the basis
for calculating each cost and a discussion of the type, nature, and number of
the various costs included;
(6)
A demonstration that Applicant's financial resources are sufficiently liquid
and unencumbered, as required by § 39.ll(c)(2), as of the date of the most
recent financial statements provided in Exhibit B-1;
(7)
A demonstration of how Applicant will maintain, at all times, the level of
resources required by § 39.ll(a)(2) with an explanation of asset valuation
methodology and calculation of projected revenue, if applicable; and
(8)
A demonstration of how financial information for operating resources will be
updated and reported to clearing members and the public under§ 39.21, and
to the Commission as required by § 39.ll(f)(l) and§ 39.19.
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d.
22293
Human Resources- Provide as Exhibit B-4:
(l)
An organizational chart showing Applicant's current and planned staff by
position and title, including key personnel (as such term is defined in§ 39.2)
and, if applicable, managerial staff reporting to key personnel.
(2)
A discussion and description of the staffing requirements needed to fulfill all
operations and associated functions, tasks, services, and areas of supervision
necessary to operate Applicant on a day-to-day basis; and
(3)
The names and qualifications of individuals who are key persmmel or other
managerial staff who will carry out the operations and associated functions.
tasks, services, and supervision needed to run the Applicant on day-to-day
basis. In particular, Applicant must identify such individuals who are
responsible for risk management, treasury, clearing operations and compliance
(and specify whether each such person is an employee or consultant/agent).
EXHIBIT C- PARTICIPANT AND PRODUCT ELIGIBILITY
Attach as Exhibit C, documents that demonstrate compliance with the participant and product
eligibility requirements set forth in§ 39.12 of the Commission's regulations, including but not
limited to:
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a.
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Participant Eligibility- Provide as Exhibit C-1, an explanation of the requirements
for becoming a clearing member and how those requirements satisfy § 39.12 and,
where applicable, support Applicant's compliance with other Core Principles.
Applicant must address how its participant eligibility requirements comply with the
core principles and regulations thereunder for financial resources, risk management,
and operational capacity. The explanation also must include:
(l)
A final version of the membership agreement between Applicant and its
clearing members that sets forth the full scope of respective rights and
obligations;
(2)
A discussion of how Applicant will monitor for and enforce compliance with
its eligibility criteria, especially minimum financial requirements;
(3)
An explanation of how the eligibility criteria are objective and allow for fair
and open access to Applicant. Applicant must include an explanation of the
differences bel ween various classes of membership or participation I hal might
be based on different levels of capital and/or creditworthiness. Applicant must
also include information about whether any differences exist in how Applicant
will monitor and enforce the obligations of its various clearing members
including any differences in access, privilege, margin levels, position limits, or
other controls;
(4)
If Applicant allows intermediation, Applicant must describe the requirements
applicable to those who may act as intermediaries on behalf of customers or
other market participants;
(5)
A description of the program for monitoring the financial status of the clearing
members on an ongoing basis;
(6)
The procedures that Applicant will follow in the event of the bankruptcy or
insolvency of a clearing member, which did not result in a default to
Applicant;
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b.
(7)
A description of whether and how Applicant would adjust clearing member
participation under continuing eligibility criteria based on the financial, risk,
or operational status of a clearing member;
(8)
A discussion of whether Applicant's clearing members will be required to be
registered with the Cmrunission; and
(9)
A list of current or prospective clearing members. Tf a current or prospective
clearing member is a Commission registrant, Applicant must identify the
member's designated self-regulatory organization.
Product Eligibility - Provide as Exhibit C-2, an Cli.'J)lanation of the criteria used to
determine the eligibility of products submitted for clearing, including:
(1)
The regulatory status of each market on which a contract to be cleared by
Applicant is traded (e.g., designated contract market, swap execution facility,
not a registered market), and whether the market for which Applicant clears
intends to join the Joint Audit Committee.
For bilaterally executed
agreements, contracts, or transactions not traded on a registered market
Applicant must describe the nature of the related market and its interest in
having the particular bilaterally executed agreement, contract, or transaction
cleared;
(2)
The criteria, and the factors considered in establishing the criteria, for
determining the types of products that will be cleared;
(3)
An explanation of how the criteria for deciding what products to clear take
into account the different risks inherent in clearing different agreements,
contracts, or transactions and how those criteria affect maintenance of assets to
support the guarantee function in varying risk envirol1ll.lents;
(4)
A precise list of all the agreements, contracts, or transactions to be covered by
Applicant's registration order, including the terms and conditions of all
agreements, contracts, or transactions;
(5)
A forecast of expected volume and open interest at the outset of clearing
operations as a derivatives clearing organization, after six months, and after
one year of operation as a derivatives clearing organization; and
(6)
The mechanics of clearing each contract, such as reliance on exchange for
physical, exchange for swap, or other substitution activity; whether the
contracts are matched prior to submission for clearing or after submission; and
other aspects of clearing mechanics that are relevant to understanding the
products that would be eligible for clearing.
EXHIBIT D- RISK MANAGEMENT
Attach as Exhibit D, documents that demonstrate compliance with the risk management
requirements set forth in§ 39.13 of the Commission's regulations, including but not limited to:
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a.
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Risk Management Framework - Provide as Exhibit D-1, a copy of Applicant's
written policies, procedures, and controls, as approved by Applicant's Board of
Directors, that establish Applicant's risk management framework as required by
§ 39 .13(b ). Applicant must also provide a description of the composition and
responsibilities of Applicant's Risk Management Committee.
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b.
22295
Measuring Risk- Provide as Exhibit D-2, a narrative explanation of how Applicant
has projected and will continue to measure its counterparty risk exposure, including:
( 1)
A description of the risk -based margin calculation methodology;
(2)
The assumptions upon which the methodology was designed. including the
risk analysis tools and procedures employed in the design process;
(3)
An explanation as to whether other margining methodologies were considered
and, if so, why they were not chosen;
(4)
A demonstration of the margin methodology as applied to real or hypothetical
clearing scenarios;
(5)
A description of the data sources for inputs used in the methodology, e.g.,
historical price data reflecting market volatility over various periods of time;
(6)
A description of the sources of price data for the measurement of current
exposures and the valuation models for addressing circumstances where
pricing data is not readily available or reliable;
(7)
The frequency and circumstances under which the margin methodology will
be reviewed and the criteria for deciding how often to review and whether to
modify a margin methodology;
(8)
An independent validation of Applicant's systems for generating initial margin
requirements, including its theoretical models;
(9)
The frequency of measuring counterparty risk exposures (mark to market),
whether counterparty risk exposures are routinely measured on an intraday
basis, whether Applicant has the operational capacity to measure counterparty
risk exposures on an intraday basis, and the circumstances under which
Applicant would conduct a non-routine intraday measurement of counterparty
risk exposures;
(10) Preliminary forecasts regarding future counterparty risk exposure and
assumptions upon which such forecasts of exposure are based;
(11) A description of any systems or software that Applicant will require clearing
members to use in order to margin their positions in their internal bookkeeping
systems, and whether and under what terms and conditions Applicant will
provide such systems or software to clearing members; and
(12) A description of the extent to which counterparty risk can be offset through
the clearing process (i.e., the limitations, if any, on Applicant's duty to fulfill
its obligations as the buyer to every seller and the seller to every buyer).
Limiting Risk - Provide as Exhibit D-3, a narrative discussion addressing the
specifics of Applicant's clearing activities, including:
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(1)
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How Applicant will collect financial information about its clearing members
and other traders or market participants, monitor price movements, and mark
to market, on a daily basis, the products and/or portfolios it clears;
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(2)
How Applicant will monitor accounts carried by clearing members, the
accumulation of positions by clearing members and other market participants,
and compliance with risk limits; and how it will use large trader infonnation;
(3)
How Applicant will detennine variation margin levels and outstanding initial
margin due;
(4)
How Applicant will identify unusually large pays on a proactive basis before
they occur;
(5)
Whether and how Applicant will compare price moves and position
information to historical patterns and to the financial information collected
from its clearing members; and how it will identify unusually large pays on a
daily basis;
(6)
How Applicant will use various risk tools and procedures such as: (i) value-atrisk calculations; (ii) stress testing; (iii) back testing; and/or (iv) other risk
management tools and procedures. If Applicant is currently clearing products
for which it is seeking registration as a derivatives clearing organization,
provide back testing results for actual portfolios containing each such product,
which demonstrate margin coverage at least at t11e 99 percent confidence level
over tl1e previous 252 trading days;
(7)
How Applicant will communicate with clearing members, settlement banks,
other derivatives clearing organizations, designated contract markets, swap
execution facilities, major swap participants, swap data repositories, and other
entities in emergency situations or circumstances that might require immediate
action by the Applicant;
(8)
How Applicant will monitor risk outside of its business hours;
(9)
How Applicant will review its clearing members' risk management practices;
(10) Whether Applicant will impose credit limits and/or employ other risk filters
(such as automatic system denial of entry of trades under certain conditions);
(ll)
Plans for handling "extreme market volatility" and how Applicant defines that
term;
(12)
An explanation of how Applicant will be able to offset positions in order to
manage risk including: (i) ensuring both Applicant and clearing members have
the operational capacity to do so; and (ii) liquidity of the relevant market,
especially with regard to bilaterally executed products;
(13) Plans for managing accounts that are "too big" to liquidate and for conducting
"what if' analyses on these accounts;
(14) If options are involved, how Applicant will manage the different and more
complex risk presented by these products;
(16)
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If Applicant intends to clear credit default swaps, credit default futures, and
any derivatives that reference either credit default swaps or credit default
futures, how Applicant will manage tl1e unique risks associated with clearing
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(15) If Applicant intends to clear swaps, whether and how often Applicant will
offer multilateral portfolio compression exercises for its clearing members;
and
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22297
these products, including but not limited to liquidity risk, currency risk,
seasonable risk, compounding risk, jump-to-default risk or similar jump risk.
d.
Existence of collateral (funds and assets) to apply to losses resulting from realized
risk- Provide as Exhibit D-4:
(l)
An explanation of the factors, process, and methodology used for calculating
and selling required collateral levels, the required inputs, the appropriateness
of those inputs, and an illustrative example;
(2)
An analysis supporting the sufficiency of Applicant's collateral levels for
capturing all or most price moves that may take place in one settlement cycle;
(3)
A description of how Applicant will value open positions and collateral assets;
(4)
A description and explanation of the forms of assets allowed as collateral, why
they are acceptable, and whether there are any haircuts or concentration limits
or charges on certain kinds of assets, including how often any such haircuts
and concentration limits or charges are reviewed;
(5)
An explanation of how and when Applicant will collect collateral, whether and
under what circumstances it will collect collateral on an intraday basis, and
what will happen if collateral is not received in a timely manner. Include a
proposed collateral collection schedule based on changes in market positions
and collateral values; and
(6)
If options are involved, a full explanation of how Applicant will manage the
associated risk through the use of collateral including, if applicable, a
discussion of Applicant's option pricing model, how it establishes its implied
volatility scan range, and other matters related to the complex matter of
managing the risk associated with the clearing of option contracts.
EXHIBIT E- SETTLEMENT PROCEDURES
Attach as Exhibit E, documents that demonstrate compliance with the settlement procedures
requirements set forth in§ 39.14 of the Commission's regulations, including but not limited to:
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Settlement - Provide as Exhibit E-1, a full description of the daily process of
settling financial obligations on all open positions being cleared. This must include:
(l)
Procedures for completing settlements on a timely basis during normal market
conditions (and no less frequently than once each business day);
(2)
Procedures for completing settlements on a timely basis in varying market
circmnstances including in the event of a default by the clearing member
creating the largest financial exposure for Applicant in extreme but plausible
market conditions;
(3)
A description of how contracts will be marked to market on at least a daily
basis;
(4)
Identification of the settlement banks used by Applicant (including
identification of the lead settlement bank, if applicable) and a copy of
Applicant's settlement bank agreement(s). Such settlement bank agreements
must (i) outline daily cash settlement procedures, (ii) state clearly when
settlement fund transfers will occur, (iii) provide procedures for settlements on
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bank holidays when the markets are open, and (iv) ensure that settlements are
final when effected;
(5)
Identification of settlement banks that Applicant will allow its clearing
members to use for margin calls and variation settlements;
(6)
A description of the criteria and review process used by Applicant when
selecting selllement banks to be used by the Applicant or its clearing
members, including criteria addressing the capitalization, creditworthiness,
access to liquidity, operational reliability, and regulation or supervision of
such settlement banks;
(7)
Procedures for monitoring the continued appropriateness of each approved
settlement bank, including a description of how Applicant monitors the full
range and concentration of its exposures to each settlement bank;
(8)
The specific means by which settlement instructions are communicated from
Applicant to the settlement bank(s);
(9)
A timetable showing the Dow of funds associated with the settlement of
financial obligations with respect to all cleared products for a 24-hour period
or such other settlement timeframe specified with respect to a particular
product; this may be presented in the form of a chart, as in the following
example:
FORM DCO -SAMPLE SETTLEMENT CYCLE CHART
VerDate Sep<11>2014
TRADE DATE - T
[INSERT TIME ZONE]
[INSERT EXACT TIMES
BELOW]
EXAMPLE OF SETTLEMENT ACTIVITY FOR WHICH TIMES SHOULD BE
PROVIDED
T _ _ pm
Last market closes (end of regular trading hours).
T Approx. __ pm
DCO/DCM/SEF establishes daily settlement price for each product based on
information generated by its [INSERT NAME OF APPLICABLE CLEARING
SYSTEM].
T By _ _ pm
Clearing members' position information for intraday settlement is obtained from
DCO's clearing system.
T+1: Approx. _ _ am
DCO provides daily initial margin (1M) and settlement variation/option premium
(SVOP) amounts to clearing members and banks.
T+1: By _ _ am
Banks commit to pay daily IM and SVOP amounts.
T+1: Approx. _ _ am
Banks pay daily IM and SVOP amounts from clearing members to DCO.
T+1: Approx. _am
Banks pay daily IM and SVOP amounts from DCO to clearing members.
T Approx. __ pm
DCO/DCM/SEF determines prices for intraday settlement
T Approx. __ pm
Clearing members' position information for intraday settlement is obtained from
DCO's clearing system.
T By approx. __ pm
DCO provides intraday IM and SVOP amounts to banks and clearing members.
T By _ _ pm
Banks commit to pay intraday IM and SVOP amounts.
T Approx. __ pm
Banks pay intraday IM and SVOP amounts from clearing members to DCO.
17:42 May 15, 2019
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T Approx. __ pm
22299
Banks pay intraday IM and SVOP amounts from DCO to clearing members.
(10) A description of what happens in the event that there are insufficient funds in a
clearing member's settlement account
(11) An explanation of how and when Applicant will collect variation margin,
whether and under what circumstances it will collect variation margin on an
intraday basis, what will happen if variation margin is not received in a timely
manner, and a proposed variation margin collection schedule based on
changes in market prices;
(12)
All the information above, to the extent relevant, for any products cleared that
may be denominated in a foreign currency; and
(13) Witl1 respect to physical settlements, identify Applicant's rules that clearly
state each obligation of Applicant with respect to physical deliveries, and
explain how Applicant intends to identify and manage risks arising from
physical settlement.
b.
c.
Recordkeeping- Provide as Exhibit E-2, a full description ofthe following:
(l)
The nature and quality of the information collected concerning the flow of
funds involved in clearing and settlement; and
(2)
How such information will be recorded, maintained, and accessed.
Relationships with other clearing organizations - Provide as Exhibit E-3, a
description of Applicant's relationships with other derivatives clearing organizations,
clearing agencies, financial market utilities, or foreign entities that perform similar
functions, including how compliance with tl1e terms and conditions of agreements or
arrangements with such other entities will be satisfied, e.g., any netting or offset
arrangements, cross-margining, portfolio margining, linkage, common banking,
common clearing programs or limited guaranty agreements or arrangements.
EXHIBIT F- TREATMENT OF FUNDS
Attach as Exhibit F. documents that demonstrate compliance with the treatment of funds
requirements set forth in§ 39.15 of the Commission's regulations, including but not limited to:
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a.
b.
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Safe custody- Provide as Exhibit F-1, documents that demonstrate:
(l)
How Applicant will ensure the safekeeping of funds and assets belonging to
clearing members and their customers in depositories and how Applicant will
minimize the risk of loss or of delay in accessing such funds and assets;
(2)
The depositories that will hold such funds and assets and any written
agreements between or among such depositories, Applicant, or its clearing
members regarding tl1e legal status of tl1e funds and assets and the specific
conditions or prerequisites for movement of the funds and assets; and
(3)
How Applicant will limit the concentration of risk in depositories where such
funds and assets arc deposited.
Segregation of customer and proprietarr funds and assets- Provide as Exhibit F-2,
documents that demonstrate:
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c.
(l)
The appropriate segregation of customer funds and assets and associated
acknowledgment documentation, including the acknowledgment letters
required under §§ 1.20 and/or 22.5, as applicable, for each bank or trust
company that Applicant will usc for the deposit of customer funds and assets;
and
(2)
Requirements or restrictions regarding commingling customer funds and
assets with proprietary funds and assets, obligating customer funds and assets
for any purpose other than to purchase, clear, and settle the products Applicant
is clearing, procedures regarding customer funds and assets which are subject
to cross-margin or similar agreements, and any other aspects of the
segregation of customer funds and assets.
investment standards- Provide as Exhibit F-3, documents that demonstrate:
(l)
Policies and procedures to ensure that funds and assets belonging to clearing
members and their customers would only be invested in instruments with
minimal credit, market, and liquidity risks, and that any investment of
customer funds or assets would comply with the requirements of§ 1.25; and
(2)
How Applicant will obtain and keep associated records and data regarding the
details of such investments.
EXHIBIT G- DEFAULT RULES AND PROCEDURES
Attach as Exhibit G, documents that demonstrate compliance with the default rules and
procedures requirements set forth in § 39.16 of the Commission's regulations, including but not
limited to:
a.
Default Management Plan - Applicant must provide a copy of its written default
management plan which must contain all of the information required by § 39.16(b),
along with Applicant's most recently documented results of a test of its default
management plan.
b.
Definition of default- Applicant must describe or otherwise document:
c.
(l)
The events (activities, lapses, or situations) tl1at will constitute a clearing
member default;
(2)
What action Applicant can take upon a default and how Applicant will
otherwise enforce the rules applicable in the event of default, including the
steps and the sequence of the steps that will be followed. Identify whether a
Default Management Committee exists and, if so, its role in the default
process: and
(3)
An example of a hypothetical default scenario and the results of the default
management process used in the scenario.
Remedial action- Applicant must describe or otl1erwise document:
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(l)
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The autl10rity and methods by which Applicant may take appropriate action in
the event of the default of a clearing member which may include, among other
things, liquidating positions, hedging, auctioning, allocating (including any
obligations of clearing members to participate in auctions or to accept
allocations), and transferring of customer accom1ts to anotl1er clearing member
(including an explanation of the movement of positions and collateral on
deposit); and
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(2)
d.
22301
Actions taken by a clearing member or other events that would put a clearing
member on Applicant's "watch list" or similar device.
Process to address shortfalls - Applicant must describe or otherwise document:
(1)
Procedures for the prompt application of Applicant and/or clearing member
financial resources to address monetary shortfalls resulting from a default;
(2)
How Applicant will make publicly available its default rules including a
description of the priority of application of financial resources in the event of
default (i.e., the "waterfall"); and
(3)
How Applicant will take timely action to contain losses and liquidity pressures
and to continue to meet each obligation of Applicant.
e.
Use of cross-margin programs -Describe or otherwise document, as applicable, how
cross-margining programs will provide for fair and efficient means of covering
losses in the event of a default of any clearing member participating in the program.
f.
Customer prioritv rule - Describe or otherwise document rules and procedures
regarding priority of customer accounts over proprietary accounts of defaulting
clearing members and, where applicable, specifically in the context of specialized
margin reduction programs such as cross-margining or common banking
arrangements with other derivatives clearing organizations, clearing agencies,
financial market utilities, or foreign entities that perform similar functions.
EXHIBIT H- RULE ENFORCEMENT
•
Attach as Exhibit H, documents that demonstrate compliance with the mle enforcement
requirements set forth in § 39.17 of the Commission's regulations, including but not limited to:
a.
Surveillance - Describe or otherwise document arrangements and resources for the
effective monitoring of compliance with Applicant's rules.
b.
Enforcement- Describe or otherwise document:
c.
(I)
Arrangements and resources for enforcing compliance with Applicant's mles
and addressing instances of non-compliance, including disciplinary tools such
as limiting, suspending, or terminating a clearing member's access or member
privileges; and
(2)
The standards and any procedural protections Applicant will follow in
imposing any such enforcement measure.
Dispute resolution- Describe or otherwise document arrangements and resources for
resolution of disputes between clearing members and Applicant.
EXHIBIT I - SYSTEM SAFEGUARDS
Attach as Exhibit I, documents that demonstrate compliance with the system safeguards
requirements set forth in§ 39.18 of the Commission's regulations, including but not limited to:
khammond on DSKBBV9HB2PROD with PROPOSALS2
a.
A description of Applicant's program of risk analysis and oversight with respect to
its operations and automated systems. Tiris program must be designed to ensure
daily processing, clearing, and settlement of trcmsactions and address each of the
following categories of risk:
(1)
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Information security;
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b.
(2)
Business continuity-disaster recovery planning and resources;
(3)
Capacity and performance planning;
(4)
Systems operations;
(5)
Systems development and quality assurance; and
(6)
Physical security and envirorunental controls.
An explanation of how Applicant will establish and maintain resources that allow for
the fulfillment of its program of risk analysis and oversight with respect to its
operations and automated systems, and a description of such resources. including:
(1)
A description of how Applicant will periodically verify that its resources are
adequate to ensure daily processing, clearing, and, settlement;
(2)
A demonstration that Applicant's automated systems are reliable, secure, and
have (and will continue to have) adequate scalable capacity;
(3)
A description of the physical, technological and personnel resources and
procedures used by Applicant as part of its business continuity and disaster
recovery plan, and support for the conclusion that these resources are
sufficient to enable the Applicant to resume daily processing, clearing, and
settlement no later than the next business day following a disruption; and
(4)
A statement identifying which such resources are Applicant's own resources
and which are provided by a service provider (outsourced). For resources that
are outsourced, provide (i) all contracts governing the outsourcing
arrangements, including all schedules and other supplemental materials, and
(ii) a demonstration that Applicant employs personnel with the expertise
necessary to enable them to supervise the service provider's delivery of the
services.
c.
An explanation of how Applicant will ensure the proper functioning of its systems.
including its program for t11e periodic objective testing and review of its systems and
back-up facilities (including all of its own and outsourced resources), and
verification tl1at all such resources will work effectively together;
d.
Identification of the persons conducting the testing, including information as to their
qualifications and independence;
e.
A description of Applicant's emergency procedures. including a copy of its written
plan for business continuity and disaster recovery and a description of how Applicant
will coordinate its business continuity and disaster recovery plan (including testing)
with its clearing members and providers of essential services such as
telecommunications, power, and water; and
f.
A description of how Applicant will report exceptional events and planned changes
to the Commission as required by §§ 39 .18(g) and 39 .18(h).
EXHIBIT J - REPORTING
Attach as Exhibit J, documents that demonstrate compliance with the reporting requirements set
forth in§ 39.19 of the Cmrnnission's regulations, including but not limited to:
a.
VerDate Sep<11>2014
17:42 May 15, 2019
A description of how Applicant will make available to Commission staff all the
information Commission staff needs in order to carry out effective oversight, e.g.,
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22303
the internal staff procedures Applicant will follow to provide such information. If
the laws or regulations of any foreign country in which Applicant is incorporated or
organized require any approval(s) by a foreign regulatory authority with respect to
the provision of any information to the Connuission, Applicant must submit
evidence that such approval(s) have been obtained.
b.
A representation that the Applicant will submit the information required to satisfy
the daily, quarterly, annual, event-specific, and requested reporting requirements
specified in § 39.19(c) of the Connuission's regulations, in the format and manner
and within the time specified by the Connnission.
EXHIBIT K- RECORDKEEPING
•
Attach as Exhibit K, documents that demonstrate compliance with the recordkeeping
requirements set forth in§ 39.20 of the Coll1111ission 's regulations, including but not limited to:
a.
Applicant's recordkeeping and record retention policies and procedures;
b.
The different activities related to the entity as a derivatives clearing organization for
which it must maintain records;
c.
The manner in which records relating to swaps and swap data are gathered and
maintained; and
d.
How Applicant will satisfy the performance standards of § 1.31 as applicable to
derivatives clearing organizations, including
c.
(1)
What "full" or "complete" will encompass with respect to each type of book
or record that will be maintained;
(2)
The form and manner in which books or records will be compiled and
maintained with respect to each type of activity for which such books or
records will be kept;
(3)
Confinnation that books and records will be open to inspection by any
representative of the Coll1111ission or of the U.S. Department of Justice;
(4)
How long books and records will be readily available and how they will be
made readily available during the first two years; and
How long books and records will be maintained (and confirmation that, in any event
they will be maintained as required in§ 1.31).
EXHIBIT L- PUBLIC INFORMATION
VerDate Sep<11>2014
Attach as Exhibit L, documents that demonstrate compliance with the public infom1ation
requirements set forth in § 39.21 of the Coll1111ission' s regulations, including but not limited to:
17:42 May 15, 2019
a.
Applicant's procedures for making its rulebook, a list of all current clearing
members, and all other information listed in § 39.2l(c) readily available to the
general public, in a timely manner, by posting such information on Applicant's
website;
b.
The URLs for Applicant's website for each item listed in § 39.21(c)(l) through
(c)(9).
c.
Any other information routinely made available to the public by Applicant;
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d.
How Applicant will make information available to clearing members and market
participants in order to allow such persons to become familiar with Applicant's
procedures before participating in clearing operations; and
e.
How clearing members will be informed of their specific rights and obligations
preceding a default and upon a default, and of the specific rights, options, and
obligations of Applicant preceding and upon a clearing member's default.
EXHIBIT M- INFORMATION SHARING
•
Attach as Exhibit M, documents that demonstrate compliance with the information sharing
requirements set forth in§ 39.22 of the Cmmnission's regulations, including but not limited to:
a.
The appropriate and applicable inforrnation sharing agreements to which Applicant
is, or intends to be, a party including any domestic or international informationsharing agreements or arrangements, whether formal or informal, which involve or
relate to Applicant's operations, especially as it relates to measuring and addressing
counterparty risk;
b.
A description of the types of information expected to be shared and how that
information will be shared;
c.
An explanation as to how information obtained pursuant to any information-sharing
agreements or arrangements would be used to further the objectives of Applicant's
risk management program and any of its surveillance programs including financial
surveillance and continuing eligibility of its clearing members; and
d.
An explanation as to how Applicant expects to obtain accurate information pursuant
to the information-sharing agreement or arrangement and the mechanisms or
procedures which would allow for timely use and application of all information.
EXHIBIT N- ANTITRUST CONSIDERATIONS
•
Attach as Exhibit N. docnments that demonstrate compliance with the antitrust considerations
requirements set forth in § 39.23 of the Commission's regulations, including but not limited to
policies or procedures to ensure compliance with the antitmst considerations requirements.
EXHIBIT 0 - GOVERNANCE
•
Attach as Exhibit 0, documents that demonstrate compliance with the governance fitness
standards requirements set forth in § 39.24 of the Commission's regulations, including but not
limited to:
a.
A copy of:
(l) The charter (or mission statement) of Applicant (if not attached as Exhibit A-8);
(3) If another entity "operates" the Applicant, the charter (or mission statement) of
such entity's Board of Directors (if not attached as Exhibit A-8); and a
description of the manner in which the Applicant will ensure that such entity's
officers, directors, employees, and agents and such entity's books and records
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(2) The charter (or mission statement) of Applicant's Board of Directors, each
committee composed entirely or in part of members of the Board of Directors
(including any Executive Committee), as well as each other committee that has
the authority to amend or constrain actions of Applicant's Board of Directors (if
not attached as Exhibit A-8);
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
22305
shall be subject to the authority of the Commission pursuant to the Act and the
Conuuission's regulations thereunder; and
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b.
A description of how Applicant's governance arrangements place a high priority on
Applicant's safety and efficiency and explicitly support the stability of the broader
financial system and other relevant public interest considerations of clearing
members, customers of clearing members, and other relevant stakeholders;
c.
A description of how the Board of Directors makes certain that Applicant's design,
rules, overall strategy, and major decisions appropriately reflect the legitimate
interests of clearing members, customers of clearing members, and other relevant
stakeholders;
d.
A description of how major decisions of the Board of Directors are clearly disclosed
to clearing members and other relevant stakeholders, and will be disclosed to the
Commission, and how major decisions of the Board of Directors having a broad
market impact are clearly disclosed to the public, to the extent consistent with other
statutory and regulatory requirements on confidentiality and disclosure;
e.
A description of how Applicant's governance arrangements are disclosed, as
appropriate, to clearing members, customers of clearing members, Applicant's
owners, and the public, and will be disclosed to the Commission, to the extent
consistent with other statutory and regulatory requirements on confidentiality and
disclosure;
f.
A description of how Applicant's governance arrangements: (1) describe the
structure pursuant to which the Board of Directors, committees, and management
operate; (2) include clear and direct lines of responsibility and accountability; (3)
clearly specify the roles and responsibilities of the Board of Directors and its
committees, including the establishment of a clear and documented risk management
framework; and (4) clearly specify the roles and responsibilities of management;
g.
A description of the procedures pursuant to which Applicant's Board of Directors
oversees Applicant's chief risk officer, risk management committee, and material
risk decisions;
h.
A description of how Applicant provides risk management, internal control, and
internal audit personnel with sufficient independence, authority, resources, and
access to the Board of Directors so that the operations of Applicant are consistent
with its risk management framework;
i.
A description of how Applicant's governance arrangements assign responsibility and
accountability for risk decisions, including in crises and emergencies, and assign
responsibility for implementing default rules and procedures, system safeguard rules
and procedures, and as applicable, recovery and wind-down plans;
j.
A description of the fitness standards applicable to members of the Board of
Directors, members of any disciplinary committee, clearing members, any other
individual or entity with direct access to settlement or clearing activities, and any
party affiliated with any of the above individuals or entities, including a description
or other documentation explaining how Applicant will collect and verify information
that supports compliance with the fitness standards and how Applicant will enforce
compliance with such standards; and
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(4) An internal organizational chart showing the lines of responsibility and
accountability for each operational unit.
22306
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k.
A description of how Applicant will make certain that: ( 1) its Board of Directors
consists of suitable individuals having appropriate skills and incentives; (2) the
performance of the Board of Directors and individual directors are reviewed on a
regular basis; and (3) managers have the appropriate experience, skills, and integrity
necessary to discharge operational and risk management responsibilities.
EXHIBIT P- CONFLICTS OF INTEREST
• Attach as Exhibit P, documents that demonstrate compliance with the conflicts of interest
requirements set forth in§ 39.25 of the Commission's regulations, including but not limited to:
a.
A description of Applicant's rules to minimize conflicts of interest in its decisionmaking process and how it enforces those rules;
b.
A description of Applicant's process for resolving such conflicts of interest or for
making fair and non-biased decisions in the event of a conflict of interest; and
c.
A description of Applicant's procedures for identifying, addressing, and managing
conflicts of interest involving members of its Board of Directors.
EXHIBIT Q- COMPOSITION OF GOVERNING BOARDS
• Attach as Exhibit Q, documents that demonstrate compliance with the composition of governing
boards requirements set forth in§ 39.26, including but not limited to documentation describing the
composition of Applicant's Board of Directors, including the number of market participants.
EXHIBIT R- LEGAL RISK CONSIDERATIONS
Attach as Exhibit R, documents that demonstrate compliance with the legal risk considerations
requirements set forth in§ 39.27 of the Commission's regulations, including but not limited to:
a.
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b.
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A discussion of how Applicant operates pursuant to a well-founded, transparent, and
enforceable legal framework that addresses each aspect of the activities of Applicant.
The framework must provide for Applicant to act as a counterparty, including, as
applicable:
(1)
Novation;
(2)
Netting arrangements;
(3)
Applicant's interest in collateral (including margin);
(4)
The steps that Applicant can take to address a default of a clearing member,
including but not limited to, the unimpeded ability to liquidate collateral and
close out or transfer positions in a timely manner;
(5)
Finality of settlement and funds transfers that are irrevocable and
unconditional when effected (no later than when Applicant's accounts are
debited and credited); and
(6)
Other significant aspects of Applicant's operations, risk management
procedures, and related requirements.
If Applicant provides, or will provide, clearing services outside the United States,
Applicant must provide a memorandum from local counsel analyzing insolvency
issues in the foreign jurisdiction where Applicant is based, which should describe or
otherwise document:
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•
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( 1)
The manner in which Applicant's clearing rules and procedures pertaining to
customer funds ("FCM Clearing Rules") segregate such funds, in accordance
with section 4d of the Act and the Commission's regulations ("ring-fence"):
(2)
The basis for the conclusion that the arrangements to ring-fence customer
funds set forth in the FCM Clearing Rules would be effective, under any
relevant non-U.S. law or regulation, in the insolvency of a futures commission
merchant ("FCM") clearing member or of the Applicant itself, including how
such customer funds would not, therefore, form part of the general estate for
distribution to the illlsecured creditors of an insolvent FCM clearing member
or of the Applicant;
(3)
The basis for the conclusion that the laws of the jurisdiction in which
Applicant is domiciled and the laws of any other relevant jurisdiction (e.g.,
other jurisdictions in which customer funds may be held) support the
enforceability of the FCM Clearing Rules;
(4)
The basis for the conclusion that a local court or insolvency official in the
jurisdiction in which Applicant is domiciled (and any other relevant
jurisdiction) respect the choice of U.S. law in governing specific aspects of the
FCM Clearing Rules to determine the extent of rights that Applicant has with
respect to customer funds and be bound to follow the FCM Clearing Rules
with respect to customer funds. The memorandum should explain whether the
application of U.S. law to customer funds would contravene any public policy
in the jurisdiction in which Applicant is domiciled (or any other relevant
jurisdiction);
(5)
The basis for the conclusion that the FCM Clearing Rules are enforceable (i.e.,
the conclusion that the Applicant may take default action, pursuant to the
FCM Clearing Rules, discretely against each FCM clearing member in respect
of FCM customer accoilllts without interference from the law of insolvency
applicable to the FCM clearing member or to Applicant); and
(6)
The basis for the conclusion that following the default of an FCM clearing
member or of the Applicant, Applicant will be able to comply with the
provisions of the U.S. Bankruptcy Code and Commission regulations with
respect to the pro rata distribution requirements set forth therein, as well as
comply with any relevant order or direction by a U.S. court (including a
bankruptcy court) regarding the distribution of customer funds.
22307
32. Revise appendix B to part 39 to
read as follows:
■
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In all cases. the memorandum must include separate discussions of the legal analysis
and conclusions with respect to: (a) the default of the Applicant, and (b) the default
of an FCM clearing member.
22308
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
COMMODITY FUTURES TRADING COMMISSION
SUBPART C ELECTION FORM
GENERAL INSTRUCTIONS: Intentional misstatements or omissions offact may constitute
federal criminal violations (7 U.S.C. 13 and 18 U.S.C. 1001).
DEFINITIONS
Unless the context requires otherwise, all terms used in this Subpart C Election Form have the same
meaning as in the Commodity Exchange Act ("Act"), and in the General Rules and Regulations of the
Commodity Futures Trading Commission ("Commission") thereunder. All references to Commission
regulations are found at 17 CFR Ch. I.
For purposes of this Subpart C Election Form, the term "Applicant" shall mean a derivatives clearing
organization that is filing this Subpart C Election Form with a Form DCO as part of an application for
registration as a derivatives clearing organization pursuant to section 5b of the Act and 17 CFR 39.3(a).
VerDate Sep<11>2014
1.
Any derivatives clearing organization requesting an election to become subject to subpart C of part 39
of the Commission's regulations must file this Subpart C Election Form. The Subpart C Election Form
includes the election to be subject to the provisions of subpart C of part 39 of the Commission's
regulations, certain required certifications, disclosures, and exhibits, and any supplements or
amendments thereto filed pursuant to 17 CFR 39.31(b) or (c) (collectively, the "Subpart C Election
Form").
2.
Any derivatives clearing organization wishing to request an extension of up to one year to comply with
any of the provisions of 17 CFR 39.34, 17 CFR 39.35 or 17 CFR 39.39, pursuant to 17 CFR 39.34(d)
or 17 CFR 39.39(f) must do so prior to filing this Subpart C Election Form. Such requests shall
become part of this Subpart C Election Form.
3.
Individuals' names, except the executing signature, shall be given in full (Last Name, First Name,
Middle Name).
4.
The signatures required in this Subpart C Election Form shall be the manual signatures of a duly
authorized representative of the derivatives clearing organization as follows: If the Subpart C Election
Form is filed by a corporation, it must be signed in the name of the corporation by a principal officer
duly authorized; if filed by a limited liability company, it must be signed in the name of the limited
liability company by a manager or member duly authorized to sign on the limited liability company's
behalf; if filed by a partnership, it must be signed in the name of the partnership by a general partner
duly authorized; if filed by an unincorporated organization or association which is not a partnership, it
must be signed in the name of such organization or association by the managing agent, i.e., a duly
authorized person who directs or manages or who participates in the directing or managing of its
affairs.
5.
All applicable items must be answered in full.
6.
Under section 5b of the Act and the Commission's regulations thereunder, the Commission is
authorized to solicit the information required to be supplied by this Subpart C Election Form from any
Applicant seeking registration as a derivatives clearing organization and from any registered
derivatives clearing organization.
7.
Disclosure of the information specified in this Subpart C Election Form is mandatory prior to the
processing of the election to become a derivatives clearing organization subject to the provisions of
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GENERAL INSTRUCTIONS
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22309
subpart C of part 39 of the Commission's regulations. The Commission may determine that additional
information is required in order to process such election.
8.
A Subpart C Election Form that is not prepared and executed in compliance with applicable
requirements and instructions may be returned as not acceptable for filing. Acceptance of this Subpart
C Election Form, however, shall not constitute a finding that the Subpart C Election Form is acceptable
as filed or that the information is true, current or complete.
9.
As provided in 17 CFR 39.3l(d), except in cases where a derivatives clearing organization submits a
request for confidential treatment with the Secretary of the Commission pursuant to the Freedom of
Information Act and 17 CFR 145.9, information supplied in this Subpart C Election Form will be
included routinely in the public files of the Commission and will be made available for inspection by
any interested person.
APPLICATION AMENDMENTS
1.
17 CFR 39.3l(b)(3) and (c)(4) require a derivatives clearing organization that has submitted a Subpart
C Election Form to promptly amend its Subpart C Election Form if it discovers a material omission or
error in, or if there is a material change in, the information provided to the Commission in the Subpart
C Election Form or other information provided in connection with the Subpart C Election Form.
2.
When amending a Subpart C Election Form, a derivatives clearing organization must re-file the
Election and Certifications page, amended if necessary, and including all required executing
signatures, and attach thereto revised exhibits or other materials marked to show changes, as
applicable.
VerDate Sep<11>2014
1.
This Subpart C Election Form must be filed electronically with the Secretary of the Commission in the
format and manner specified by the Commission.
2.
Any supplemental information must be filed electronically with the Division of Clearing and Risk, or
any successor division, in the format and manner specified by the Commission.
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WHERE TO FILE
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COMMODITY FUTURES TRADING COMMISSION
SUBPART C ELECTION FORM
ELECTION AND CERTIFICATIONS
Exact Name of the Derivatives Clearing Organization
(as set forth in its charter, if an Applicant,
or as set forth in its most recent order of registration, if registered with the Commission)
D
Check here and complete sections 1 and 3 below, if the organization is an Applicant.
D
Check here and complete sections 2 and 3 below, if the organization currently is registered with
the Commission as a derivatives clearing organization.
1.
The derivatives clearing organization named above hereby elects to become subject to the provisions
of subpart C of part 39 of the Commission's regulations in the event that the Commission approves its
application for registration as a derivatives clearing organization.
The derivatives clearing organization and the undersigned each certify that, in the event that the
Commission approves the derivatives clearing organization's application for registration and pennits
its election to become subject to subpart C of part 39 of the Commission's regulations:
a.
The derivatives clearing organization will be in compliance with such regulations as of the
date set forth in the notice thereof provided by the Commission pursuant to 17 CFR
39.31(c)(2), except to the limited extent that the Commission has granted the derivatives
clearing organization an extension of time to comply with: ( 1) specified provisions of 17
CFR 39.34, pursuant to 17 CFR 39.34(d); and/or (2) specified provisions ofl7 CFR 39.35
and/or 17 CFR 39.39, pursuant to 17 CFR 39.39(f);
b.
The derivatives clearing organization will be in compliance with all provisions of 17 CFR
39.34, 39.35 and/or 39.39 for which t11e Commission, pursuant to 17 CFR 39.34(d) and/or 17
CFR 39.39(f), has granted an extension of time to comply in accordance with the terms of
such extensions; and
c.
The derivatives clearing organization will remain in compliance with the provisions contained
in subpart C of part 39 of the Commission's regulations until this election is rescinded
pursuantto 17 CFR 3 9.31 (e).
Name of Derivatives Clearing Organization
By: _______________________________________________________________
Manual Signature of Duly Authorized Person
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Print Name and Title of Signatory
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
2.
22311
The derivatives clearing organization named above hereby elects to become subject to the provisions
of subpart C of part 39 of the Commission's regulations as of:
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ("Effective Date")
[insert date, which must be at least 10 business days after the date this Subpart C Election Form is
filed with the Commission].
The derivatives clearing organization and the undersigned each certify that:
a.
As of the Effective Date set forth above, the derivatives clearing organization shall be in
compliance with subpart C of part 39 of the Commission's regulations, except to the limited
extent that the Commission has granted the derivatives clearing organization an extension of
time to comply with: (1) specified provisions of 17 CFR 39.34, pursuantto 17 CFR 39.34(d);
and/or (2) specified provisions of 17 CFR 39.35 and/or 17 CFR 39.39, pursuantto 17 CFR
39.39(f);
b.
The derivatives clearing organization will be in compliance with all provisions of 17 CFR
39.34, 39.35 and/or 39.39 for which the Commission, pursuant to 17 CFR 39.34(d) and/or 17
CFR 39.39(f), has granted an extension of time to comply in accordance with the terms of
such extensions; and
c.
The derivatives clearing organization will remain in compliance with provisions contained in
subpart C of part 39 of the Commission's regulations until this election is rescinded pursuant
to 17 CFR 39.31(e).
Name of Derivatives Clearing Organization
By: _____________________________________________________________
Manual Signature of Duly Authorized Person
Print Name and Title of Signatory
3.
The derivatives clearing organization named above has duly caused this Subpart C Election Form
(which includes, as an integral part thereof, the Election and Certifications and all Disclosures and
day of
Exhibits) to be signed on its behalf by its duly authorized representative as of the
_______________, 20
The derivatives clearing organization and the
undersigned each represent hereby that, to the best of their knowledge, all information contained in this
Subpart C Election Form is true, current and complete in all material respects. It is understood that all
required items including, without limitation, the Election and Certifications and Disclosures and
Exhibits, are considered integral parts of this Subpart C Election Form.
Name of Derivatives Clearing Organization
By: _____________________________________________________________
Manual Signature of Duly Authorized Person
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Print Name and Title of Signatory
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Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
COMMODITY FUTURES TRADING COMMISSION
PART 39, SUBPART C ELECTION FORM
DISCLOSURES AND EXHIBITS
Each derivatives clearing organization that requests an election to become subject to the provisions set forth
in subpart C of part 39 of the Commission's regulations shall provide the Disclosures and Exhibits set forth
below:
DISCLOSURES:
The derivatives clearing organization shall publish on its website in a readily identifiable location, the
following documents that are required to be completed pursuant to 17 CFR 39.37:
1.
The derivatives clearing organization's responses to the Disclosure Framework for Financial
Market Infrastructures ("Disclosure Framework"), published by the Committee on Payments and
Market Infrastructure ("CPMI") and the Board of the International Organization of Securities
Conunissions ("IOSCO"). The derivatives clearing organization's responses must be completed
in accordance with section 2.0 and Annex A of the Disclosure Framework and must fully explain
how the derivatives clearing organization observes the Principles for Financial Market
Infrastructures ("PFMis") published by CPMI-IOSCO.
Provide the URL to the specific page on the derivatives clearing organization's website
where its responses to the Disclosure Framework may be fom1d:
2.
The most recent quantitative disclosure prepared by the derivatives clearing organization that
satisfies the Public Quantitative Disclosure Standards for Central Counterparties published by
CPMI-IOSCO ("Quantitative Disclosure").
If applicable, provide the URL to the specific page on the derivatives clearing organization's
website where its Quantitative Disclosure may be found:
EXHIBITS:
VerDate Sep<11>2014
l.
The derivatives clearing organization must include a Table of Contents listing each Exhibit
required by this Subpart C Election Form.
2.
If the derivatives clearing organization is an Applicant in its Form DCO, the derivatives clearing
organization may summarize such information and provide a cross-reference to the Exhibit in this
Subpart C Election Fonn that contains the required information.
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EXHIBIT INSTRUCTIONS:
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
22313
The derivatives clearing organization shall provide the following Exhibits to this Subpart C Election Form:
EXHIBIT A- COMPLIANCE WITH SUBPART C
Attach, as Exhibit A, a regulatory compliance chart that sets forth citations to the relevant rules,
policies, and procedures of the derivatives clearing organization that address§§ 39.32-39.39 of the
Conunission's regulations and a narrative sununary of the marmer in which the derivatives
clearing organization will comply with each regulation.
The narrative summary shall: (a) specifically and meaningfully explain the manner in which the
derivatives clearing organization will comply with each such regulation; (b) sufficiently integrate
references to documents contained in the exhibits to tllis Subpart C Election Form to clearly
convey the derivatives clearing organization's policies and procedures with respect to each
regulation; and (c) readily identify within such exhibits those derivatives clearing organization
rules and governing documents that support the certifications set forth in this Subpart C Election
Form. The narrative summary may be included as part of the compliance chart required by
Exhibit A or a separate document within Exhibit A.
All citations and compliance summaries shall be separated by individual regulation and shall be
clearly labeled with the corresponding regulation.
EXHIBIT B- FINANCIAL RESOURCES
Attach, as Exhibit B, infonnation and documents that demonstrate compliance with tl1e financial
resource requirements set forth in § 39.33 of the Commission's regulations, including but not
limited to:
a.
Valuation of financial resources - Attach as Exhibit B-1, a demonstration that
assessments for additional guaranty fund contributions (i.e., guaranty fund contributions
that are not prefunded) are not included in calculating tl1e financial resources available to
meet the derivatives clearing organization's obligations under§ 39.33(a) or§ 39.ll(a)(1).
b.
Liquidity resources- Attach as Exhibit B-2, a demonstration tl1at the derivatives clearing
organization maintains eligible liquidity resources as required under~ 39.33(c).
c.
Liquidity providers- Attach as Exhibit B-3, a demonstration that the derivatives clearing
organization's liquidity providers meet the requirements as set forth in§ 39.33(d).
d.
Documentation of financial resources and liquidity resources - Attach as Exhibit B-4, a
demonstration that the derivatives clearing organization docmnents its supporting
rationale for, and has appropriate governance arrangements relating to, the amount of
total financial resources it maintains pursuant to § 39.33(a) and the amount of total
liquidity resources it maintains pursuant to§ 39.33(c).
EXHIBIT C- SYSTEM SAFEGUARDS
Attach, as Exhibit C, infonnation and documents that demonstrate compliance with the system
safeguards requirements set forth in § 39.34 of the Commission's regulations, including but not
limited to:
VerDate Sep<11>2014
17:42 May 15, 2019
Attach as Exhibit C-1, a demonstration that, notwitl1standing § 39.18(c)(2), the business
continuity and disaster recovery plan described in § 39.18(c)( 1) and the physical,
technological, and personnel resources described in § 39.18(c)(l) enable the derivatives
clearing organization to recover its operations and rcslU1lc daily processing, clearing, and
settlement no later than two hours following the disruption, for any disruption including a
wide-scale disruption.
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a.
22314
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
b.
Attach as Exhibit C-2, a demonstration that the derivatives clearing organization
maintains a degree of geographic dispersal of physical, technological and personnel
resources consistent with the requirements set forth in § 39 .34(b ).
c.
Attach as Exhibit C-3, a demonstration that the derivatives clearing organization
conducts regular, periodic tests of its business continuity and disaster recovery plans and
resources and its capacity to achieve the required recovery time objective in the event of
a wide-scale disruption, and that the provisions of§ 39.18(e) apply to such testing.
EXHIBIT D - DEFAULT RULES AND PROCEDURES FOR UNCOVERED LOSSES OR
SHORTFALLS
Attach, as Exhibit D, information and documents that demonstrate compliance with the
requirements for default rules and procedures for uncovered losses or shortfalls set forth in§ 39.35
of the Commission's regulations, including but not limited to:
a.
Allocation of uncovered credit losses - Attach as Exhibit D-1, a demonstration that the
derivatives clearing organization has explicit rules and procedures that address fully any
loss arising from any individual or combined default relating to any clearing member's
obligations to the derivatives clearing organization.
b.
Allocation of uncovered liguiditv shortfalls- Attach as Exhibit D-2, a demonstration that
the derivatives clearing organization has established rules and/or procedures that enable it
to promptly meet all of its settlement obligations, on a same day and, as appropriate,
intraday and multiday basis, in the context of the occurrence of the scenarios set forth in
§ 39.35(b)(l)(i) and (ii). The derivatives clearing organization must demonstrate how
such rules and procedures comply with the requirements of§ 39.35(b)(2).
EXHIBIT E- RISK MANAGEMENT
VerDate Sep<11>2014
a.
Stress tests of financial resources - Attach as Exhibit E-1, a demonstration that the
derivatives clearing organization conducts stress tests of its financial resources in
accordance with the standards and practices set forth in§ 39.36(a);
b.
Sensitivitv analysis of margin model- Attach as Exhibit E-2, a demonstration that the
derivatives clearing organization conducts on a monthly basis or more frequently as
appropriate, a sensitivity analysis of its margin models to analyze and monitor model
performance and overall margin coverage. The derivatives clearing organization shall
demonstrate that the sensitivity analysis is conducted on both actual and hypothetical
positions and in accordance with the requirements set forth in§ 39.36(b)(2) and (3);
c.
Stress tests of liguiditv resources - Attach as Exhibit E-3, a demonstration that the
derivatives clearing organization conducts stress tests of its liquidity resources in
accordance with the standards and practices set forth in§ 39.36(c);
d.
Theoretical and empirical properties - Attach as Exhibit E-4, a demonstration that the
derivatives clearing organization conducts an assessment of the theoretical and empirical
properties of its margin model for all products it clears;
e.
Validation - Attach as Exhibit E-5, a demonstration that the derivatives clearing
organization conducts on an annual basis, a full validation of its financial risk
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Attach, as Exhibit E, information and documents that demonstrate compliance with the risk
management requirements set forth in§ 39.36 of the Connuission's regulations, including but not
limited to:
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
22315
management model and its liquidity risk management model in accordance with the
requirements set forth in§ 39.36(e);
f.
Custody and investment risk - Attach as Exhibit E-6, a demonstration that the custody
and investment arrangements of the derivatives clearing organization's own funds and
assets are subject to the same requirements as those specified in § 39.15 for the funds
and assets of clearing members, and apply to the derivatives clearing organization's own
funds and assets to the same extent as if such funds and assets belonged to clearing
members; and
g.
Settlement banks - Attach as Exhibit E-7, a demonstration that the derivatives clearing
organization, monitors, manages, and limits its credit and liquidity risks arising from its
settlement banks; establishes and monitors adherence to strict criteria for its settlement
banks that take account of, among other things, their regulation and supervision,
creditworthiness. capitalization, access to liquidity, and operdtional reliability; and
monitors and manages the concentration of credit and liquidity exposures to its settlement
banks.
EXHIBIT F- RECOVERY AND WIND-DOWN
VerDate Sep<11>2014
a.
Recoverv and wind-down plans - Attach as Exhibit F-1, a demonstration that the
derivatives clearing organization has separate plans that set forth in detail: recovery or
orderly wind-down, necessitated by uncovered credit losses or liquidity shortfalls, and
recovery or orderly wind-down, necessitated by general business risk, operational risk, or
any other risk that threatens the derivatives clearing organization's viability as a going
concern. The demonstration shall also include how the plans comply with the
requirements of §39.39(c).
b.
Financial resources to support recovery - Attach as Exhibit F-2, a narrative summary
that demonstrates how the financial statements filed with the Commission pursuant to §§
39.11 and 39.33 demonstrate that the derivatives clearing organization maintains
sufficient unencumbered liquid financial assets, funded by the equity of its owners, to
implement its recovery or wind-down plans. The narrative summary shall include a
description of how the derivatives clearing organization complies with the requirements
of§ 39.39(d).
c.
Additional financial resources - Attach as Exhibit F-3. a demonstration that the
derivatives clearing organization maintains viable plans for raising additional financial
resources as required under§ 39.39(e).
17:42 May 15, 2019
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khammond on DSKBBV9HB2PROD with PROPOSALS2
Attach, as Exhibit F, information and documents that demonstrate compliance with the recovery
and wind-down requirements set forth in§ 39.39 of the Commission's regulations, including but
not limited to:
22316
Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
BILLING CODE 6351–01–C
PART 140—ORGANIZATION,
FUNCTIONS, AND PROCEDURES OF
THE COMMISSION
33. The authority citation for part 140
continues to read as follows:
■
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c),
13(d), 13(e), and 16(b).
34. In § 140.94, revise paragraph (c) to
read as follows:
■
§ 140.94 Delegation of authority to the
Director of the Division of Swap Dealer and
Intermediary Oversight and the Director of
the Division of Clearing and Risk.
khammond on DSKBBV9HB2PROD with PROPOSALS2
*
*
*
*
*
(c) The Commission hereby delegates,
until such time as the Commission
orders otherwise, the following function
to the Director of the Division of
Clearing and Risk and to such members
of the Commission’s staff acting under
his or her direction as he or she may
designate from time to time:
(1) The authority to review
applications for registration as a
derivatives clearing organization filed
with the Commission under § 39.3(a)(1)
of this chapter, to determine that an
application is materially complete
pursuant to § 39.3(a)(2) of this chapter,
to request additional information in
support of an application pursuant to
§ 39.3(a)(3) of this chapter, to extend the
review period for an application
pursuant to § 39.3(a)(6) of this chapter,
to stay the running of the 180-day
review period if an application is
incomplete pursuant to § 39.3(b)(1) of
this chapter, to review requests for
amendments to orders of registration
filed with the Commission under
§ 39.3(d)(1) of this chapter, to request
additional information in support of a
request for an amendment to an order of
registration pursuant to § 39.3(d)(2) of
this chapter, and to request additional
information in support of a rule
submission pursuant to § 39.3(g)(3) of
this chapter;
(2) All functions reserved to the
Commission in § 39.4(a) of this chapter;
(3) All functions reserved to the
Commission in § 39.5(b)(2), (b)(3)(ix),
(c)(1), and (d)(3) of this chapter;
(4) All functions reserved to the
Commission in § 39.10(c)(4)(iv) of this
chapter;
(5) All functions reserved to the
Commission in § 39.11(b)(1)(v),
(b)(2)(ii), (c)(1) and (3), and (f)(1), and
(2) of this chapter;
(6) All functions reserved to the
Commission in § 39.12(a)(5)(iii) of this
chapter;
(7) All functions reserved to the
Commission in § 39.13(g)(8)(ii),
VerDate Sep<11>2014
17:42 May 15, 2019
Jkt 247001
(h)(1)(i)(C), (h)(1)(ii), (h)(3)(i) and (ii),
and (h)(5)(i)(C) of this chapter;
(8) The authority to request additional
information in support of a rule
submission under §§ 39.13(i)(2) and
39.15(b)(2)(iii) of this chapter;
(9) All functions reserved to the
Commission in § 39.19(c)(2), (c)(3)(iv),
and (c)(5) of this chapter;
(10) All functions reserved to the
Commission in § 39.20(a)(5) of this
chapter;
(11) All functions reserved to the
Commission in § 39.21(c) of this
chapter;
(12) All functions reserved to the
Commission in § 39.31 of this chapter;
and
(13) The authority to approve the
requests described in §§ 39.34(d) and
39.39(f) of this chapter.
*
*
*
*
*
Issued in Washington, DC, on April 29,
2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Appendix 3—Statement of
Commissioner Dan M. Berkovitz
Introduction
I support issuing for public comment the
notice of proposed rulemaking (‘‘NPRM’’) to
amend certain provisions of part 39 of the
Commission’s regulations governing
derivatives clearing organizations (‘‘DCOs’’).
Part 39 generally covers registration and
regulation of DCOs that centrally clear
futures, options, and swaps regulated by the
Commission.
The NPRM includes a number of beneficial
provisions. I commend the staff of the
Division of Clearing and Risk for this
important effort to clarify and clean up some
issues in the rules and staff guidance that
have accumulated since part 39 was
substantively amended in 2011 and 2013.
The NPRM also proposes several changes to
the regulations that merit scrutiny as
outlined below. I particularly look forward to
comments on those provisions to help guide
the Commission’s deliberations on the
proposed amendments.
Appendix 2—Statement of Chairman J.
Christopher Giancarlo
Background
Central clearing of futures positions has
been a fundamental risk mitigation measure
for derivatives market participants in the
United States for well over a hundred years.
In more recent times, as futures and swap
trading has grown dramatically,1 central
clearing of derivatives including swaps has
become a critical element in risk
management of the financial system as a
whole. In response to the 2008 financial
crisis, world leaders at the G20 summit in
Pittsburgh established central clearing for
derivatives as a core objective in mitigating
systemic risk.2 DCOs are a critical component
of the clearing infrastructure, and effective
clearinghouse registration and regulation is
key to facilitating efficient, sound derivatives
markets and preventing another financial
crisis.
As described in the NPRM, the
Commission adopted regulations in 2011 and
Swaps clearing is among the most
sweeping and significant of the swaps
reforms adopted by the Dodd-Frank Act. By
any measure, the CFTC’s swaps clearing
regime has been robust and highly
successful.
In 2011 and 2013, the Commission adopted
regulations in part 39 to implement the
Dodd-Frank Act’s Core Principles for
Derivatives Clearing Organizations (DCOs).
Since the adoption of these rules,
Commission staff has worked with DCOs
regarding questions concerning the
interpretation and implementation of the
regulations, and issued related staff relief or
guidance.
As part of Project KISS, the Commission is
proposing to revise or delete certain
provisions in part 39. These revisions will
improve the clarity of the text, codify staff
relief and guidance, and simplify processes
for registration or reporting. There are also a
few new requirements with respect to default
procedures and reporting in response to more
recent events, such as the launch of bitcoin
futures contracts and the Nasdaq Clearing
default. For these reasons, I support this
proposal.
1 A CFTC study published in 1998 noted that an
estimated 272 million futures and options contracts
were traded globally in 1986, while recent Futures
Industry Association data indicates that 30.28
billion futures and options contracts were traded
globally in 2018. See CFTC, Division of Economic
Analysis, The Global Competitiveness of U.S.
Futures Markets Revisited (November 1999);
available at https://www.cftc.gov/sites/default/files/
idc/groups/public/@swaps/documents/file/plstudy_
53_cftc.pdf; FIA Releases Annual Trading Statistics
showing Record [Exchange Traded Derivatives]
Volume in 2018; available at https://fia.org/articles/
fia-releases-annual-trading-statistics-showingrecord-etd-volume-2018. Similarly, the trading of
over-the-counter derivatives expanded from about
$72 trillion in notional amount in 1998 to about
$595 trillion in 2018. See Bank of International
Settlements, OTC derivatives notional amount
outstanding by risk category; available at https://
stats.bis.org/statx/srs/tseries/OTC_DERIV/H:A:A:A:
5J:A:5J:A:TO1:TO1:A:A:3:C?t=D5.1&p=
20172&x=DER_RISK.3.CL_MARKET_
RISK.T:B:D:A&o=w:19981.,s:line.nn,t:
Derivatives%20risk%20category.
2 See G20, Leaders’ Statement: The Pittsburgh
Summit (Sept. 24–25, 2009); available at https://
www.treasury.gov/resource-center/international/g7g20/Documents/pittsburgh_summit_leaders_
statement_250909.pdf.
Note: The following appendices will not
appear in the Code of Federal Regulations.
Appendices to Derivatives Clearing
Organization General Provisions and
Core Principles—Commission Voting
Summary, Chairman’s Statement, and
Commissioner’s Statement
Appendix 1—Commission Voting
Summary
On this matter, Chairman Giancarlo and
Commissioners Quintenz, Behnam, Stump,
and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
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Federal Register / Vol. 84, No. 95 / Thursday, May 16, 2019 / Proposed Rules
2013 to further implement DCO core
principles and Title VIII of the Dodd-Frank
Act. Based on experience in implementing
these regulations and subsequent
developments, including the establishment of
international principles for clearing, the
CFTC staff has provided guidance on the new
regulations. It is now appropriate for the
Commission to address this experience and
these developments through amendments to
our regulations.
khammond on DSKBBV9HB2PROD with PROPOSALS2
Codification and Clarification
The NPRM includes numerous
amendments that clarify, further define, or
provide more explicit direction to market
participants. Governance requirements are
more fully developed and applied across all
DCOs. The NPRM adds new regulations
39.24, 39.25, and 39.26 that establish
governance requirements for DCOs to better
ensure that DCOs are well managed.3 These
amendments provide greater certainty and
uniform rules, and are important not only for
fairness and consistency, but to improve risk
management across the clearing space. The
changes may help guard against risks from
governance failures.
While the new governance regulations are
beneficial, many of the provisions set out
only general principles and do not provide
specific guidance or prescriptive standards. I
look forward to public comment on whether
more explicit guidance or requirements
would be appropriate for any specific
provisions. In particular, I look forward to
comments on whether members should play
a larger role in governance.
Under the NPRM, regulation 39.16 would
be amended to improve requirements around
member default management.4 The recent
member default at NASDAQ Clearing
reinforces the importance of default
management mechanisms and information
sharing when a default occurs.5 The
amendments explicitly require DCOs to have
a default committee that must include
clearing members. In addition, the
amendments would require a DCO to include
members in tests of the default management
plan. I look forward to comments on how and
when DCO members should be included in
default management.
In addition to the above, the NPRM would
provide a number of more discrete
improvements, such as an explicit
requirement for initial margin to cover
concentration risk; a requirement for DCO
personnel to certify certain reports; and
several new reporting requirements around
settlement bank arrangements, depositories,
and liquidity funding arrangements.
Clarifying these types of issues will help
maintain consistent, objective, and
transparent oversight of registered DCOs.
3 See
NPRM section IV.J.
NPRM section IV.F.
5 See Luke Clancy, Margin or membership?
Regulators react to Nasdaq default, Risk.net (Feb.
7, 2019) available at: https://www.risk.net/
regulation/6366441/margin-or-membershipregulators-react-to-nasdaq-default.
4 See
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17:42 May 15, 2019
Jkt 247001
Issues Warranting Further Comment and
Consideration
The NPRM includes several proposed
amendments that, while beneficial in some
respects, may also present additional issues
for the Commission to consider in developing
the final rule. Comments in these areas
would be particularly helpful to inform the
Commission in its deliberations.
Changes to regulation 39.13(g)(8) regarding
calculation of initial margin and in
particular, excess margin, attempt to
incorporate in the regulation, and to clarify,
staff guidance.6 Getting initial margin
calculations right is critical to providing
sufficient resources to cover variation margin
shortfalls that may occur when resolving a
member’s default. The proposed standard for
margin to be ‘‘commensurate with the risk
presented by each customer account,’’ as a
principle, seems appropriate. However, little
guidance is provided on how that principle
should be applied or the appropriate
parameters for consideration. Given the
importance of initial margin calculations, I
look forward to comments on whether the
Commission should provide a more detailed
standard in the regulation or further guidance
on the calculation.
New regulation 39.13(i) provides explicit
procedures and requirements for filing DCO
rules to implement a cross-margining
program with other clearing organizations.7
From a general policy perspective,
establishing explicit procedures in regulation
for evaluating such arrangements would
facilitate consistent, objective reviews by the
Commission.
However, multi-entity cross-margining—
which could cross borders and involve
multiple regulatory regimes of different
regulators—creates additional layers of legal,
operational, and financial risk that may be
difficult to evaluate. The members of the
DCO could be affected in ways not
previously contemplated and that may be
more obscure to the members and difficult
for them to assess. The information that the
DCO would be required to provide to the
Commission under the NPRM is fashioned
from less complex portfolio margining
evaluation requirements and is general in
nature. Will a bankruptcy involving a
member of one of the clearing organizations,
the DCO, or the other clearing organization
affect the other entity and its members in
ways that are not anticipated? Are there
margin model risks, such as greater
concentration risk across both entities, that
are not properly accounted for in the
proposed regulations? Do members of the
DCO have other concerns and do they have
appropriate mechanisms to voice those
concerns through the DCO rules, governance
structures, and/or CFTC review procedures?
I look forward to reviewing the comments on
these and other issues regarding the proposed
multi-entity cross margining regulations.
6 See
7 See
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NPRM section IV.D.5.
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22317
Finally, the NPRM would establish
regulation 40.5 as the mechanism for
Commission review of certain DCO rule sets
including: (1) A request to transfer a DCO’s
open interest—in many cases its entire open
interest, (2) cross-margining programs among
different clearing organizations—including
across borders and for entities subject to
different regulators, and (3) commingling of
futures, options, and swaps positions in a
section 4d(a) futures account. These rule
reviews could involve consideration of novel
issues, customer protections, and other
factors. Accordingly, I have some concern
that regulation 40.5 may not provide
sufficiently robust review procedures or the
Commission with adequate authority to
require a DCO to mitigate risks arising from
the proposed actions.
Section 40.5 was intended to address
voluntary submission of DCO rule changes
pursuant to section 5c(c) of the Commodity
Exchange Act. While the process for
submission and Commission review is more
detailed under regulation 40.5 than under
regulation 40.6, regulation 40.5 provides for
automatic approval after 45 days if that
period is not extended by the Commission
and a narrow standard of review; namely, the
Commission shall approve a DCO rule under
review unless it ‘‘is inconsistent with the
[Commodity Exchange] Act or Commission’s
regulations.’’ However, the DCO activities to
which this review procedure would be
applied under the NPRM are significant
actions that likely will raise customer
protection concerns, entail a sophisticated
risk management analysis, and call for a more
nuanced review and response than can be
accomplished under the blunt ‘‘inconsistent
with the CEA’’ standard that governs the
Commission under regulation 40.5.
Accordingly, I encourage comments on
whether regulation 40.5 is the appropriate
mechanism to review these proposed DCO
actions or whether a more balanced
procedure should be employed that would
provide the Commission more flexibility to
ensure the proposed actions adequately
address issues involving customer protection,
potential risks to FCMs, and market integrity.
Conclusion
In conclusion, I commend the staff of the
Division of Clearing and Risk for their efforts
in preparing the NPRM to codify practices
that are currently addressed through staff
guidance and to conform our regulations to
developments that have occurred since the
regulations were issued. The NPRM will help
clarify and provide explicit rules for clearing
organizations that provide a vital service to
derivatives markets. Finally, I look forward to
the public comments on the NPRM,
particularly on the proposed amendments
discussed above.
[FR Doc. 2019–09025 Filed 5–15–19; 8:45 am]
BILLING CODE 6351–01–P
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]]>Agencies
[Federal Register Volume 84, Number 95 (Thursday, May 16, 2019)]
[Proposed Rules]
[Pages 22226-22317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-09025]
[[Page 22225]]
Vol. 84
Thursday,
No. 95
May 16, 2019
Part II
Commodity Futures Trading Commission
-----------------------------------------------------------------------
17 CFR Parts 1, 39, and 140
Derivatives Clearing Organization General Provisions and Core
Principles; Proposed Rule
Federal Register / Vol. 84 , No. 95 / Thursday, May 16, 2019 /
Proposed Rules
[[Page 22226]]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Parts 1, 39, and 140
RIN 3038-AE66
Derivatives Clearing Organization General Provisions and Core
Principles
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission) is
proposing amendments to certain regulations applicable to registered
derivatives clearing organizations (DCOs). These proposed amendments
would, among other things, address certain risk management and
reporting obligations, clarify the meaning of certain provisions,
simplify processes for registration and reporting, and codify existing
staff relief and guidance. In addition, the Commission is proposing
technical amendments to certain provisions, including certain
delegation provisions, in other parts of its regulations.
DATES: Comments must be received by July 15, 2019.
ADDRESSES: You may submit comments, identified by ``Derivatives
Clearing Organization General Provisions and Core Principles'' and RIN
3038-AE66, by any of the following methods:
CFTC Comments Portal: https://comments.cftc.gov. Select
the ``Submit Comments'' link for this rulemaking and follow the
instructions on the Public Comment Form.
Mail: Send to Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
Hand Delivery/Courier: Follow the same instructions as for
Mail, above.
Please submit your comments using only one of these methods. To
avoid possible delays with mail or in-person deliveries, submissions
through the CFTC Comments Portal are encouraged.
All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://comments.cftc.gov. You should submit only information that you
wish to make available publicly. If you wish the Commission to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act (FOIA), a petition for confidential
treatment of the exempt information may be submitted according to the
procedures established in Sec. 145.9 of the Commission's
regulations.\1\
---------------------------------------------------------------------------
\1\ 17 CFR 145.9. Commission regulations referred to herein are
found at 17 CFR chapter I (2018), and are accessible on the
Commission's website at https://www.cftc.gov/LawRegulation/CommodityExchangeAct/index.htm.
---------------------------------------------------------------------------
The Commission reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse or remove any or all of your
submission from https://comments.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the FOIA.
FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director,
202-418-5096, [email protected]; Parisa Abadi, Associate Director, 202-
418-6620, [email protected]; Eileen R. Chotiner, Senior Compliance
Analyst, 202-418-5467, [email protected]; Abigail S. Knauff, Special
Counsel, 202-418-5123, [email protected]; Division of Clearing and Risk,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street NW, Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. Project KISS
B. Regulatory Framework for DCOs
II. Amendments to Part 1--General Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From Depositories--Sec. 1.20
B. Governance and Conflicts of Interest--Sec. Sec. 1.59, 1.63,
and 1.69
III. Amendments to Part 39--Subpart A--General Provisions Applicable
to DCOs
A. Definitions--Sec. 39.2
B. Procedures for Registration--Sec. 39.3
C. Procedures for Implementing DCO Rules and Clearing New
Products
IV. Amendments to Part 39--Subpart B--Compliance With Core
Principles
A. Compliance With Core Principles--Sec. 39.10
B. Financial Resources--Sec. 39.11
C. Participant and Product Eligibility--Sec. 39.12
D. Risk Management--Sec. 39.13
E. Treatment of Funds--Sec. 39.15
F. Default Rules and Procedures--Sec. 39.16
G. Rule Enforcement--Sec. 39.17
H. Reporting--Sec. 39.19
I. Public Information--Sec. 39.21
J. Governance Fitness Standards, Conflicts of Interest, and
Composition of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
K. Legal Risk--Sec. 39.27
L. Fully-Collateralized Positions
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to the Provisions
A. Financial Resources for SIDCOs and Subpart C DCOs--Sec.
39.33
B. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec.
39.37
D. Corrections to Subpart C Regulations
VI. Amendments to Appendix A to Part 39--Form DCO
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
VIII. Amendments to Part 140--Organization, Functions, and
Procedures of the Commission
IX. Related Matters
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Cost-Benefit Considerations
D. Antitrust Considerations
I. Background
A. Project KISS
The Commission is engaging in an agency-wide review of its rules,
regulations, and practices to make them simpler, less burdensome, and
less costly, and to make progress on G-20 regulatory reforms. This
initiative is called Project KISS, which stands for ``Keep It Simple,
Stupid.'' \2\ Consistent with these objectives, the Commission is
proposing amendments to regulations applicable to DCOs to, among other
things, enhance certain risk management and reporting obligations,
clarify the meaning of certain provisions, simplify processes for
registration and reporting, and codify existing relief and guidance.
---------------------------------------------------------------------------
\2\ See Remarks of Acting Chairman J. Christopher Giancarlo
before the 42nd Annual International Futures Industry Conference in
Boca Raton, FL, Mar. 15, 2017, available at https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20. On February 24, 2017,
President Donald J. Trump issued Executive Order 13777: Enforcing
the Regulatory Reform Agenda (E.O. 13777). E.O. 13777 directs
federal agencies, among other things, to designate a Regulatory
Reform Officer and establish a Regulatory Reform Task Force.
Although the CFTC, as an independent federal agency, is not bound by
E.O. 13777, the Commission is nevertheless engaging in an agency-
wide review of its rules, regulations, and practices to make them
simpler, less burdensome, and less costly. See Request for
Information, 82 FR 23756 (May 24, 2017).
---------------------------------------------------------------------------
B. Regulatory Framework for DCOs
Section 5b(c)(2) of the Commodity Exchange Act (CEA) sets forth
core principles with which a DCO must comply in order to be registered
and to maintain registration as a DCO (DCO Core Principles).\3\ In
2011, the Commission adopted regulations in
[[Page 22227]]
subparts A and B of part 39 to implement the DCO Core Principles.\4\ In
2013, the Commission adopted regulations in subpart C of part 39 \5\ to
establish additional standards for compliance with the DCO Core
Principles for those DCOs that have been designated as systemically
important (SIDCOs) by the Financial Stability Oversight Council in
accordance with Title VIII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act).\6\ The subpart C regulations
are consistent with the Principles for Financial Market Infrastructures
(PFMIs), published by the Committee on Payments and Market
Infrastructures (CPMI) and the Technical Committee of the International
Organization of Securities Commissions (IOSCO).\7\ Other DCOs may elect
to opt-in to the subpart C requirements (subpart C DCOs) in order to
achieve status as a qualifying central counterparty (QCCP).\8\
---------------------------------------------------------------------------
\3\ 7 U.S.C. 7a-1.
\4\ See Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR 69334 (Nov. 8, 2011) (codified at 17 CFR part
39); Customer Clearing Documentation, Timing of Acceptance for
Clearing, and Clearing Member Risk Management, 77 FR 21278 (Apr. 9,
2012) (further amending Sec. 39.12).
\5\ Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013).
\6\ See Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\7\ See CPMI-IOSCO, Principles for Financial Market
Infrastructures (Apr. 2012), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD377.pdf.
\8\ In July 2012, the Basel Committee on Banking Supervision,
the international body that sets standards for the regulation of
banks, published the ``Capital Requirements for Bank Exposures to
Central Counterparties'' (Basel CCP Capital Requirements), which
describes standards for capital charges arising from bank exposures
to central counterparties (CCPs) related to over-the-counter
derivatives, exchange-traded derivatives, and securities financing
transactions. The Basel CCP Capital Requirements create financial
incentives for banks, including their subsidiaries and affiliates,
to clear financial derivatives with CCPs that are prudentially
supervised in a jurisdiction where the relevant regulator has
adopted rules or regulations that are consistent with the standards
set forth in the PFMIs. Specifically, the Basel CCP Capital
Requirements introduce new capital charges based on counterparty
risk for banks conducting financial derivatives transactions through
a CCP. These incentives include (1) lower capital charges for
exposures arising from derivatives cleared through a QCCP, and (2)
significantly higher capital charges for exposures arising from
derivatives cleared through non-qualifying CCPs. A QCCP is defined
as an entity that (i) is licensed to operate as a CCP and is
permitted by the appropriate regulator to operate as such, and (ii)
is prudentially supervised in a jurisdiction where the relevant
regulator has established and publicly indicated that it applies to
the CCP, on an ongoing basis, domestic rules and regulations that
are consistent with the PFMIs. The failure of a CCP to achieve QCCP
status could result in significant costs to its bank customers.
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Since the part 39 regulations were adopted, Commission staff has
worked with DCOs to address questions regarding interpretation and
implementation of the requirements established in the regulations. In
light of this, the Commission believes it would be helpful to revise or
clarify certain provisions of part 39 and to codify staff relief or
guidance granted in the interim. The Commission is also proposing a few
new requirements with respect to default procedures and event-specific
reporting in response to recent events. The Commission believes these
changes will provide greater clarity and transparency for DCOs and DCO
applicants and lead to more effective DCO compliance and risk
management generally.
The Commission has carefully considered the costs and benefits
associated with the proposed amendments, and invites commenters to
provide data and analysis regarding any aspect of the proposed
rulemaking. In addition to the amendments proposed herein, the
Commission requests comment for any other aspects of part 39 that
commenters believe the Commission should clarify or otherwise amend.
II. Amendments to Part 1--General Regulations Under the Commodity
Exchange Act
A. Written Acknowledgment From Depositories--Sec. 1.20
Regulation 1.20(d)(1) requires that a futures commission merchant
(FCM) obtain a written acknowledgment from each depository with which
the FCM deposits futures customer funds.\9\ The written acknowledgment
must conform to a template letter set forth in appendix A to Sec.
1.20, and the template letter includes certain requirements set forth
in Sec. 1.20(d)(3) through (6). Regulation 1.20(d)(1) further
provides, however, that an FCM is not required to obtain a written
acknowledgment from a DCO that has adopted rules that provide for the
segregation of customer funds in accordance with all relevant
provisions of the CEA and the Commission's rules and orders thereunder.
The Commission is proposing to amend Sec. 1.20(d) to clarify that the
requirements listed in Sec. 1.20(d)(3) through (6) do not apply to a
DCO, or to an FCM that clears through that DCO, if the DCO has adopted
rules that provide for the segregation of customer funds. The proposed
changes are not intended to be substantive, but rather to reflect the
Commission's intent when Sec. 1.20 was last amended. Nonetheless, the
Commission emphasizes that it has ample means of obtaining information
regarding accounts held at a DCO under Sec. 1.20 by virtue of its
ongoing oversight and supervision of DCOs. The Commission also is
proposing to amend Sec. 1.20(d)(7) and (8) to explicitly account for
FCMs that deposit customer funds with a DCO and thus are not required
to obtain a written acknowledgment letter.
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\9\ Regulation 22.5 applies the written acknowledgment letter
requirements of Sec. 1.20(d) to FCMs and DCOs in connection with
the holding of cleared swaps customer collateral.
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B. Governance and Conflicts of Interest--Sec. Sec. 1.59, 1.63, and
1.69
In the course of adopting the current part 39 regulations, the
Commission removed and replaced Sec. 39.2,\10\ which had exempted DCOs
from all Commission regulations except for those specified therein (the
``Sec. 39.2 exemption''). The Commission noted that the Sec. 39.2
exemption failed to account for regulations applicable to DCOs that
were adopted later, such as Sec. 1.49.\11\ The Commission further
noted that removal of the Sec. 39.2 exemption would subject DCOs only
to Sec. 1.49 and three additional regulations: Sec. Sec. 1.59
(activities of self-regulatory organization employees, governing board
members, committee members, and consultants); 1.63 (service on self-
regulatory organization governing boards or committees by persons with
disciplinary histories); and 1.69 (voting by interested members of
self-regulatory organization governing boards and various
committees).\12\ The Commission explained that these three provisions
would be superseded by regulations the Commission had proposed to
implement Core Principles O (Governance Arrangements), P (Conflicts of
Interest), and Q (Composition of Governing Boards).\13\
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\10\ The current Sec. 39.2 sets forth definitions of terms used
in part 39.
\11\ See Risk Management Requirements for Derivatives Clearing
Organizations, 76 FR 3698, 3714 (Jan. 20, 2011) (proposed rule).
\12\ Id. at 3714 & n.77.
\13\ See Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18, 2010)
(proposed rule); Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities; Additional Requirements Regarding the Mitigation of
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011) (proposed rule).
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However, the Commission did not adopt those regulations, and
Sec. Sec. 1.59, 1.63, and 1.69 became applicable to DCOs. The
Commission is now proposing to adopt implementing regulations for Core
Principles O, P, and Q by moving certain requirements from subpart C,
which is applicable to only SIDCOs and subpart C DCOs, to subpart B,
which is applicable to all registered
[[Page 22228]]
DCOs (discussed further below). Therefore, the Commission is proposing
to restore DCOs' exemption from Sec. Sec. 1.59, 1.63, and 1.69 by
removing ``clearing organization'' from the definition of ``self-
regulatory organization'' in each of those regulations. The Commission
is also proposing to amend Sec. 1.64 to remove language that makes
clear that the provision does not apply to DCOs. The amendments to the
other provisions make that language no longer necessary.
III. Amendments to Part 39--Subpart A--General Provisions Applicable to
DCOs
A. Definitions--Sec. 39.2
Regulation 39.2 sets forth definitions applicable to terms used in
part 39 of the Commission's regulations. Since Sec. 39.2 was adopted,
the Commission has adopted definitions for some of the same terms that
apply in other Commission regulations. Accordingly, the Commission is
proposing amendments to Sec. 39.2 in order to maintain consistency
with terms defined elsewhere in Commission regulations and to provide
clarity with respect to the use of these terms.
1. Business Day
Regulation 39.19(b)(3) defines ``business day,'' but because the
definition is contained within Sec. 39.19, it is not clear that it is
applicable to uses of the term ``business day'' elsewhere in part 39.
The Commission is therefore proposing to remove Sec. 39.19(b)(3) and
include the definition of ``business day'' in Sec. 39.2. The
Commission also is proposing to clarify that the term ``Federal
holidays'' in the ``business day'' definition refers to the schedule of
U.S. federal holidays established under 5 U.S.C. 6103. The Commission
is specifying this because some DCOs registered with the Commission are
located outside the United States. Finally, the Commission is defining
``foreign holiday'' as a day on which a DCO and its domestic financial
markets are closed for a holiday that is not a Federal holiday in the
United States, and adding the term to the list of exceptions to the
definition of ``business day.'' The Commission believes there is no
reason to require foreign DCOs to report on a non-trading day.
2. Customer
Regulation 39.2 defines ``customer,'' for purposes of part 39, as a
person trading in any commodity named in the definition of
``commodity'' in section 1a(9) of the CEA or in Sec. 1.3 of the
Commission's regulations, or in any swap as defined in section 1a(47)
of the CEA or in Sec. 1.3. The definition further distinguishes a
customer from the owner or holder of a house account.
After Sec. 39.2 was adopted, the Commission amended the definition
of ``customer'' in Sec. 1.3, to mean any person who uses a futures
commission merchant, introducing broker, commodity trading advisor, or
commodity pool operator as an agent in connection with trading in any
commodity interest. The Commission also amended the definition of
``commodity interest'' in Sec. 1.3 to include any swap as defined in
the CEA, by the Commission, or jointly by the Commission and the
Securities and Exchange Commission.
Because the definition of ``customer'' in Sec. 1.3 now encompasses
the definition in Sec. 39.2, the Commission believes that the
definition in Sec. 39.2 is unnecessary and may create uncertainty.
Therefore, the Commission is proposing to remove the definition of
``customer'' in Sec. 39.2, leaving the definition in Sec. 1.3 as the
applicable definition for purposes of part 39.
3. Customer Account or Customer Origin
Regulation 39.2 defines ``customer account or customer origin'' as
a clearing member account held on behalf of customers that is subject
to section 4d(a) or section 4d(f) of the CEA. After Sec. 39.2 was
adopted, the Commission adopted the definition of ``customer account''
in Sec. 1.3 to include both a futures account and a cleared swaps
customer account, which are accounts subject to sections 4d(a) and
4d(f) of the CEA, respectively.
The Commission believes that having a definition of ``customer
account or customer origin'' in Sec. 39.2 and a definition of
``customer account'' in Sec. 1.3 may create uncertainty. Because the
part 39 regulations use both ``customer account'' and ``customer
origin'' terms, the Commission is proposing to amend the definition of
``customer account or customer origin'' in Sec. 39.2 to cross-
reference the definition of ``customer account'' in Sec. 1.3, rather
than removing the definition or the term ``customer origin.''
4. Enterprise Risk Management
The Commission is proposing to define ``enterprise risk
management'' because the term is used in proposed Sec. 39.10(d), which
is discussed below.
5. Fully-Collateralized Position
The Commission is proposing to define ``fully-collateralized
position'' in conjunction with proposed exceptions from several part 39
regulations for DCOs that clear fully-collateralized positions, as
discussed below.
6. Key Personnel
The Commission is proposing to add ``chief information security
officer'' to the list of positions identified in the definition of
``key personnel'' in Sec. 39.2. In the event of a cybersecurity
incident, it is critical that Commission staff be able to quickly
contact the person at each DCO responsible for responding to the
incident to assess the DCO's response as well as to coordinate efforts
among DCOs as necessary.
B. Procedures for Registration--Sec. 39.3
1. Application Procedures--Sec. 39.3(a)
The Commission is proposing to make several changes to its
procedures for registration as a DCO, set forth in Sec. 39.3.
Regulation 39.3(a)(1) refers to ``[a]n organization desiring to be
registered as a [DCO],'' while Sec. 39.3(a)(2) refers to ``[a]ny
person seeking to register as a [DCO].'' To make the language
consistent, the Commission is proposing to revise Sec. 39.3(a)(1) and
(2) to refer to an ``entity seeking to register as a [DCO].'' The
Commission is proposing additional changes to Sec. 39.3(a)(1) to
improve the clarity of the text.
Regulation 39.3(a)(2) requires an applicant for DCO registration to
submit to the Commission a completed Form DCO, which is provided in
appendix A to part 39.\14\ Since the adoption of Form DCO, the
Commission has identified several areas in which changes to Form DCO
are needed. Many of the revisions to the part 39 regulations proposed
herein would require corresponding changes to Form DCO. Therefore, the
Commission is proposing to revise Form DCO as discussed in Section VI.
below.
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\14\ At the time Sec. 39.3(a)(2) was adopted, Form DCO was the
only appendix to part 39. Since then, appendices have been added to
part 39, and Form DCO is now set forth in appendix A. Therefore, the
Commission is proposing to revise Sec. 39.3(a)(2) to reference
``Form DCO . . . as provided in appendix A to this part.''
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Regulation 39.3(a)(3) provides that at any time during the
application review process, the Commission may request that the DCO
applicant submit supplemental information in order for the Commission
to process the application. An applicant is required to ``file
electronically'' such supplemental information with the Secretary of
the Commission, in the format and manner specified by the Commission.
The Commission is proposing to amend Sec. 39.3(a)(3) to require an
applicant to ``provide'' such supplemental information and to delete
the
[[Page 22229]]
requirement that it be filed with the Secretary of the Commission. By
making these changes, yet retaining the requirement that the
information be provided in the format and manner specified by the
Commission, the Commission and DCO applicants would have greater
flexibility. For example, the Commission would be able to permit an
applicant to provide requested information through a presentation to
Commission staff.
Regulation 39.3(a)(5) provides for certain sections of a DCO
application to be made public, including the ``first page of the Form
DCO cover sheet.'' The regulation refers to Form DCO as it appears in
the print edition of the Code of Federal Regulations. However, the
Commission is aware that Form DCO may appear differently in other
sources, so the Commission is proposing to amend Sec. 39.3(a)(5) to
specify that the ``first page of the Form DCO cover sheet (up to and
including the General Information section)'' will be made public. The
Commission is also proposing to revise the provision to include
specific references to the Form DCO exhibits that will be made public.
Finally, the Commission is proposing to adopt new Sec. 39.3(a)(6),
which would permit the Commission to extend the 180-day review period
for DCO applications specified in Sec. 39.3(a)(1) for any period of
time to which the applicant agrees in writing. This provision would be
similar to Sec. 40.5(d)(2), which allows the Commission to extend the
review period for rules submitted for Commission review and approval,
if the registered entity that submitted the rule agrees in writing. The
Commission believes it is important to have the ability to extend the
review period for a DCO application so that, in the event that any
issues or concerns arise that cannot be resolved in a timely manner,
the Commission does not find itself in the position of having to deny
the application.
2. Stay of Application Review--Sec. 39.3(b)
Regulation 39.3(b)(2) provides for delegation to the Director of
the Division, with the concurrence of the General Counsel, the
authority to notify an applicant ``seeking designation under section
6(a) of the [CEA]'' that the application is materially incomplete and
the running of the 180-day period is stayed. By its terms, section 6(a)
of the CEA applies only to designation of contract markets. However,
under Sec. 39.3(a), the Commission applies the same procedures to DCO
applications. Because DCOs are ``registered'' and not ``designated,''
the Commission is substituting ``registration'' for ``designation'' in
Sec. 39.3(b)(2).
3. Amendment of an Order of Registration--Sec. 39.3(a)(2)
Regulation 39.3(a)(2) specifies that any person seeking to register
as a DCO, any applicant amending its pending application, and any
registered DCO seeking to amend its order of registration must submit
to the Commission a completed Form DCO, which must include a cover
sheet, all applicable exhibits, and any supplemental materials,
including amendments thereto, as provided in appendix A to part 39. The
Form DCO instructions correspond to this requirement and currently
specify that requests for amending a registration order and any
associated exhibits must be submitted via Form DCO.
The Commission is proposing to change the requirements regarding a
DCO's request to amend an order of registration. First, the Commission
proposes to amend Sec. 39.3(a)(2) and Form DCO to eliminate the
required use of Form DCO to request an amended order of registration
from the Commission. Under current practice, a DCO is permitted to file
a request for an amended order with the Commission rather than
submitting Form DCO. Commission staff typically will review the
request, obtain additional information from the DCO where necessary,
and subsequently recommend to the Commission whether to grant or deny
the amended order. Given current practice, the Commission believes that
an updated Form DCO is not needed to request an amended order of
registration. Second, the Commission proposes to amend Sec. 39.3(a)(4)
to state that an applicant only needs to file amended exhibits and
other information when filing a Form DCO to update a pending
application.
Consistent with existing Commission practice and the proposal to
eliminate the use of Form DCO to request an amended registration order,
the Commission is proposing new Sec. 39.3(d) to establish a separate
process for such requests. A DCO would be required to provide the
Commission with any additional information and documentation necessary
to review a request to amend an order of registration. The Commission
would issue an amended order if the Commission determines that the DCO
would continue to maintain compliance with the Act and the Commission's
regulations after such an amendment. Further, the Commission may also
issue an amended order of registration subject to conditions. The
Commission also proposes to specify that it may decline to issue an
amended order based upon a determination that the DCO would not
continue to maintain compliance with the Act and the Commission's
regulations upon such amendment.
4. Dormant Registration--Sec. 39.3(d)
Regulation 39.3(d) establishes the procedure for a dormant DCO to
reinstate its registration before it can begin ``listing or relisting''
products for clearing. The Commission is proposing to replace ``listing
or relisting'' with ``accepting'' to more accurately describe a DCO's
activities. The Commission also proposes to renumber Sec. 39.3(d) as
Sec. 39.3(e).
5. Vacation of Registration--Sec. 39.3(e)
Section 7 of the CEA and Sec. 39.3(e) of the Commission's
regulations permit a DCO to request that the Commission vacate its
registration. Orders of vacation of registration issued by the
Commission have included requirements based on section 7 of the CEA and
other Commission regulations that are not specifically listed in Sec.
39.3(e). The Commission is proposing to amend Sec. 39.3(e) to codify
these requirements and provide greater transparency to any DCO that is
considering vacating its registration. To implement the proposed
changes, the Commission is proposing to renumber current Sec. 39.3(e)
as Sec. 39.3(f)(1).
Section 7 of the CEA requires any registered entity that wishes to
have its registration vacated to make a written request to the
Commission. Section 7 also requires that the request be made at least
90 days prior to the date on which the registered entity wants the
vacation to take effect. The Commission is proposing to adopt Sec.
39.3(f)(1)(i) to specifically require a DCO to state in its request the
date it wishes to have its registration vacated and to make the request
at least 90 days prior to that date.
The Commission is also proposing to adopt Sec. 39.3(f)(1)(ii) to
require a DCO to state in its request how it intends to transfer or
otherwise unwind all open positions at the DCO. Under the proposed
rule, any actions to transfer or unwind positions would be required to
reflect the interests of affected clearing members and their customers.
The Commission believes this requirement will help ensure that a DCO
that plans to voluntarily cease its clearing activity will do so with
minimal disruptions to its members and the markets it serves.
The Commission is proposing to adopt Sec. 39.3(f)(1)(iii) and (iv)
to require a DCO to continue to maintain its books and records after
its registration has
[[Page 22230]]
been vacated for the requisite statutory and regulatory retention
periods, and to require a DCO to make all such books and records
available for inspection by any representative of the Commission or the
United States Department of Justice after its registration has been
vacated, as set forth in Sec. 1.31 of the Commission's regulations.
The Commission has included this requirement in previous orders of
vacation based on Sec. 39.3(f), which states that a vacation of
registration ``shall not affect any action taken or to be taken by the
Commission based upon actions, activities or events occurring during
the time that the entity was registered with the Commission.'' \15\ The
Commission is proposing this requirement to further ensure that a DCO
does not destroy its books and records in order to hinder or avoid
Commission action following the vacation of its registration.
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\15\ To accommodate the proposed changes, the Commission is
proposing to include this sentence as part of Sec. 39.3(f)(1).
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Finally, section 7 of the CEA requires the Commission to
``forthwith send a copy'' of the notice that was filed with the
Commission requesting vacation and the order of vacation to all other
registered entities. The Commission is proposing to adopt Sec.
39.3(f)(2) to specify that this requirement will be met by posting the
required documents on the Commission's website. This provision was
written and amended before the internet expanded to its current form
and level of access.\16\ The Commission believes that posting the
required documents on its website is the most effective and efficient
way of providing the required information to all registered entities,
as well as the public.
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\16\ The requirement to send a copy of the notice and order was
first included in section 7 in 1922. The Grain Futures Act, Public
Law 67-331 ch. 369, sec. 7, 42 Stat. 1002 (1922). Section 7 was most
recently amended in 2000, to cover all types of registered entities,
including DCOs. Commodity Futures Modernization Act of 2000, Public
Law 106-554, Title I, sec. 123(a)(17), 114 Stat. 2763 (2000).
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6. Request for Transfer of Registration and Open Interest--Sec.
39.3(f)
Regulation 39.3(f) establishes procedures that a DCO must follow to
request the transfer of its DCO registration and positions comprising
open interest for clearing and settlement, in anticipation of a
corporate change. Regulation 39.3(f) also pertains to instances in
which a corporate change results in the transfer of all or
substantially all of a DCO's assets to another legal entity.
Commission staff has found that the requirements of Sec. 39.3(f)
have created confusion for DCOs which merely want to convert the DCO
from one type of legal entity to another or change the place of
domicile for the DCO's legal entity without changing the DCO's
operations or transferring the DCO's registration to new ownership. The
Commission also recognizes that a transfer of open interest would not
necessarily be tied to a corporate change.\17\ For example, a DCO may
wish to transfer open interest to another DCO that is also a subsidiary
of the same parent company, or to another DCO in connection with
ceasing its clearing services for a particular product.
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\17\ The Commission notes, however, that a transfer of open
interest in this regard would not be in the context of a default,
which would typically involve a DCO transferring positions from one
FCM to another FCM.
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To separate the procedures for a request to transfer open interest
from those procedures to report a change to the DCO's corporate
structure or ownership, the Commission is proposing changes to Sec.
39.3(f), to be renumbered as Sec. 39.3(g), to simplify the
requirements for requesting a transfer of open interest and remove
references to transfers of registration and requirements regarding
corporate changes. Proposed Sec. 39.3(g) would only apply to instances
in which a DCO requests to transfer its open interest. Changes to the
DCO's ownership would continue to be addressed under Sec.
39.19(c)(4)(viii) (proposed to be renumbered as Sec. 39.19(c)(4)(ix)).
Additionally, as discussed further below, the Commission is proposing
to require a DCO to report a change to the legal name under which it
operates in proposed Sec. 39.19(c)(4)(xi). The Commission is also
proposing conforming changes to Sec. 39.19(c)(4)(ix) to remove cross-
references to Sec. 39.3(f).
Under the proposed amendments to Sec. 39.3(g), a DCO seeking to
transfer its open interest would be required to submit rules for
Commission approval pursuant to Sec. 40.5,\18\ rather than submitting
a request for an order at least three months prior to the anticipated
transfer. In an effort to simplify the existing requirements, the
proposed change would permit the transfer to take effect after a 45-day
Commission review period. The 45-day review period would be intended to
ensure that clearing members are made aware of the intended transfer
and to determine whether the transferee DCO is suitable to take on the
transfer \19\ and would be able to continue to operate in compliance
with the CEA and the Commission's regulations. As part of its
submission pursuant to Sec. 40.5, the DCO would be required to
include: (1) The underlying agreement that governs the transfer; (2) a
description of the transfer, including the reason for the transfer and
its impact on the rights and obligations of clearing members and market
participants holding positions that comprise the DCO's open interest;
(3) a discussion of the transferee's ability to comply with the CEA,
including the DCO Core Principles, and the Commission's regulations
thereunder; (4) the transferee's rules marked to show changes that
would result from acceptance of the transferred positions; (5) a list
of products for which the DCO requests transfer of open interest; and
(6) a representation by the transferee that it is in and will maintain
compliance with the CEA, including the DCO Core Principles, and the
Commission's regulations thereunder upon transfer of the open interest.
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\18\ SIDCOs should consider whether the facts and circumstances
of the approval sought pursuant to a Sec. 40.5 filing also obligate
a SIDCO to file a Sec. 40.10 submission.
\19\ The Commission notes that, under the existing framework,
positions cleared for U.S. customers must be cleared by a registered
DCO, while proprietary positions of U.S. persons may be cleared by
registered or exempt DCOs. As a result, the Commission would need to
ensure that the positions are transferred to an entity that is
appropriately registered or exempt from DCO registration.
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C. Procedures for Implementing DCO Rules and Clearing New Products
1. Request for Approval of Rules--Sec. 39.4(a)
Regulation 39.4(a) specifies that an applicant for registration or
a registered DCO may request, pursuant to the procedures set forth in
Sec. 40.5, that the Commission approve any or all of its rules prior
to their implementation. In practice, the Commission's review of
applications for DCO registration includes review of the applicant's
rules, which are required to be submitted as Exhibit A-2 to Form DCO.
The Commission's issuance of an order of registration as a DCO
constitutes an approval of the applicant's rules that were submitted as
part of the application. Accordingly, the Commission is proposing to
delete the reference in Sec. 39.4(a) to an applicant for registration,
as it is unnecessary for an applicant to separately request approval of
its rules.
2. Portfolio Margining--Sec. 39.4(e)
Regulation 39.4(e) establishes certain procedural requirements that
apply to a DCO seeking approval for a futures account portfolio
margining program. Under Sec. 39.4(e), a DCO seeking to provide a
portfolio margining program under which securities would be held in
[[Page 22231]]
a futures account is required to petition the Commission for an order
``under section 4d of the [CEA].'' To conform terminology to other
provisions in part 39 which distinguish between futures accounts
subject to section 4d(a) of the CEA and cleared swaps accounts subject
to section 4d(f) of the CEA, the Commission is proposing to substitute
``section 4d(a)'' for ``section 4d'' in Sec. 39.4(e).
IV. Amendments to Part 39--Subpart B--Compliance With Core Principles
A. Compliance With Core Principles--Sec. 39.10
1. Chief Compliance Officer--Sec. 39.10(c)
Regulation 39.10(c)(1)(ii) requires that a DCO's chief compliance
officer (CCO) report to the board of directors or the senior officer of
the DCO. The Commission recognizes that a legal entity registered as a
DCO may engage in substantial activities not related to clearing, in
which case it may be more appropriate for the CCO to report to the
senior officer responsible for the DCO's clearing activities. For
example, traditionally, exchanges have had clearing operations as a
component of their overall structure. In some instances, the exchange
is the same legal entity as the DCO, and therefore, the senior officer
of the entity would not necessarily be focused on the clearing
operations. In light of this, the Commission is proposing to amend
Sec. 39.10(c)(1)(ii) to permit the CCO to report to the senior officer
responsible for the DCO's clearing activities. The Commission also is
proposing to amend Sec. 39.10(c)(4)(i) to permit the CCO to submit the
annual report (which is discussed below) to the senior officer
responsible for the DCO's clearing activities.\20\
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\20\ Regulation 39.10(c)(3) also requires the CCO to ``provide
the annual report to the board of directors or the senior officer.''
Because this requirement is set forth in greater detail in Sec.
39.10(c)(4)(i), the Commission is proposing to remove, rather than
amend, the language in Sec. 39.10(c)(3).
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Regulation 39.10(c)(3)(i) requires the CCO to prepare an annual
report that contains a description of the DCO's written policies and
procedures, including the code of ethics and conflict of interest
policies. The Commission is proposing to amend this requirement to
allow a DCO to incorporate by reference the parts of its most recent
CCO annual report containing such description, to the extent that the
DCO's written policies and procedures have not materially changed since
they were most recently described in a previously submitted CCO annual
report. This is intended to help make the process of preparing the CCO
annual report more efficient by not requiring the report to repeat
potentially lengthy descriptions of policies and procedures that have
already been described in a CCO annual report previously submitted to
the Commission. However, to ensure that the descriptions remain current
and easily accessible, the Commission is proposing to allow this
incorporation by reference only to a CCO annual report submitted to the
Commission within the five-year period prior to the date of the CCO
annual report containing such incorporation by reference. The
Commission believes that this timeframe is appropriate given the record
retention requirements of Sec. 39.20. The Commission wishes to stress
that this ability to incorporate by reference only applies to
descriptions of policies and procedures that have not materially
changed and does not apply to the CCO's assessment of their
effectiveness or other requirements outside of Sec. 39.10(c)(3)(i).
The Commission also is proposing to amend Sec. 39.10(c)(3)(ii)(A),
which requires the CCO to prepare an annual report that reviews each
``core principle and applicable Commission regulation,'' and with
respect to each, identifies the compliance policies and procedures that
are designed to ensure compliance ``with the core principle.'' In order
to be consistent with the first part of the requirement, the Commission
is proposing to change the language of the second part to ``with each
core principle and applicable regulation.'' The Commission is further
proposing to amend Sec. 39.10(c)(3)(ii) to clarify that, for SIDCOs
and subpart C DCOs, this includes the Commission's regulations in
subpart C of part 39. In addition, the Commission is further proposing
to require that the compliance policies and procedures be identified
``by name, rule number, or other identifier'' to clarify that this
provision is intended to require the CCO annual report to clearly and
specifically identify the policies and procedures intended to comply
with each core principle and applicable regulation.
Finally, Sec. 39.10(c)(4)(i) requires the CCO to provide the
annual report to the board of directors or senior officer of the DCO
for review prior to submitting it to the Commission. The Commission is
proposing to amend the provision to require that this process be
described in the annual report, including providing the date on which
the report was submitted to the board of directors or senior officer.
The Commission notes that Sec. 39.10(c)(4)(i) already requires the
submission of the report to the board of directors or senior officer to
be recorded in the board of directors' meeting minutes or otherwise, as
evidence of compliance with this requirement. However, the Commission
believes that it is reasonable to require similar disclosure in the CCO
annual report so that compliance is evident outside the context of an
examination of the DCO's board of directors' meeting minutes or other
records. The Commission notes that some DCOs already describe this
process in the cover letter submitted along with the CCO annual report,
but the Commission prefers that this description appear in the annual
report itself or in an annex, schedule, or exhibit attached to and
included with the annual report. The Commission is also proposing to
amend Sec. 39.10(c)(4)(ii) by removing the requirement that the CCO
annual report be submitted concurrently with the DCO's fiscal year-end
audited financial statement, to be consistent with a proposed change to
Sec. 39.19(c)(3)(iv) described below.
2. Enterprise Risk Management--Sec. 39.10(d)
The Commission is proposing to add new Sec. 39.10(d) \21\ to
specifically provide that a DCO is required to have a program of
enterprise risk management, which would be defined in Sec. 39.2 as an
enterprise-wide strategic business process intended to identify
potential events that may affect the enterprise and to manage the
probability or impact of those events on the enterprise as a whole,
such that the overall risk remains within the enterprise's risk
appetite and provides reasonable assurance that the DCO can continue to
achieve its objectives, including compliance with the CEA and
[[Page 22232]]
Commission regulations. The proposed definition is intended to be
applicable to a variety of corporate structures, including stand-alone
DCOs, legal entities that are a DCO but also perform other functions
(such as a DCM), and corporate groups that consist of a DCO and legally
separate but affiliated entities.\22\
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\21\ The Commission is proposing to place the requirement for an
enterprise risk management program in Sec. 39.10, which codifies
Core Principle A (pertaining to compliance with the DCO Core
Principles generally), to emphasize the broad application of an
enterprise risk management program to a DCO's operations and
services. The Commission previously declined to adopt an enterprise
risk management requirement applicable to DCOs in a rulemaking
pertaining to a specific Core Principle--Core Principle I, ``System
Safeguards''--because such a requirement ``must be addressed in a
more comprehensive fashion involving more than the system safeguards
context alone, and thus are not appropriate for this rulemaking.''
See System Safeguards Testing Requirements for Derivatives Clearing
Organizations, 81 FR 64322, 64332 (Sept. 19, 2016). Other Commission
regulations codify various specific aspects of risk management. For
example, Sec. 39.13 codifies Core Principle D, which focuses on
market risk and credit risk; Sec. 39.18 codifies Core Principle I,
which addresses system safeguards; and Sec. 39.27 codifies Core
Principle R, which addresses legal risk. By including the enterprise
risk management requirement in Sec. 39.10, the Commission intends
to underscore that a properly designed and managed enterprise risk
management program covers all risks.
\22\ The term ``enterprise-wide'' is intended to require that
the process of identifying, assessing, measuring, monitoring, and
managing risk apply to the entire legal entity and its affiliates as
a collective whole, with the objective to manage the risks to the
DCO. A DCO would satisfy its obligations under paragraph (d)(1) (and
paragraphs (d)(2) and (3), as discussed below) if it is part of a
corporate group that has in place an enterprise risk management
program that includes the DCO within its scope and complies with the
requirements of this section.
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An enterprise risk management program requires an entity to assess
all potential risks it faces, including but not limited to systemic,
cyber, legal, credit, liquidity, concentration, general business,
operational, custody and investment, conduct, financial, reporting,
compliance, governance, strategic, and reputational risks. An
enterprise risk management program also requires the entity to identify
and assess those risks on an enterprise-wide basis, meaning that it
must consider whether individual risks across the organization and its
affiliates are interrelated and may create a combined exposure to the
entity that differs from the sum of the individual risks, and must
measure, monitor, and manage such risks accordingly. Additionally, an
enterprise risk management program requires an assessment of both the
nominal or inherent risk that exists prior to the establishment of any
risk mitigation activities (i.e., controls) as well as the residual
risk that remains once such mitigation activities or risk responses are
taken into account.
Existing Commission regulations already require a DCO to manage its
risks.\23\ However, the Commission has found that some DCOs lack a
formal enterprise risk management program that addresses their risks on
an enterprise-wide basis. Therefore, proposed Sec. 39.10(d)(1) and (2)
would require a DCO to implement an enterprise risk management program
and establish and maintain an enterprise risk management framework.
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\23\ For example, Sec. 39.11(a) requires a DCO to identify and
adequately manage its general business risks; Sec. 39.13(a)
requires a DCO to ensure that it possesses the ability to manage the
risks associated with discharging the responsibilities of the DCO
through the use of appropriate tools and procedures; and Sec.
39.13(b) requires a DCO to establish and maintain written policies,
procedures, and controls which establish an appropriate risk
management framework that, at a minimum, clearly identifies and
documents the range of risks to which the DCO is exposed and
addresses the monitoring and management of the entirety of those
risks.
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Consistent with Sec. 39.10(b), the Commission does not intend to
be overly prescriptive by requiring specific standards and
methodologies. A DCO should develop an enterprise risk management
program that works best for its specific risk exposures, product types,
customer base, market segment, and organizational structure, among
other things, as long as the program meets the proposed minimum
standards and any other legal and regulatory requirements.
Therefore, proposed Sec. 39.10(d)(3) would require a DCO to follow
generally accepted standards and industry best practices with respect
to the development and ongoing monitoring of its enterprise risk
management framework, assessment of the performance of the enterprise
risk management program, and the management and mitigation of risk to
the DCO. The Commission is mindful that best practices evolve and
change over time and does not, therefore, wish to prescribe specific
standards in its regulations.\24\
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\24\ In the interests of offering guidance to DCOs, however, the
Commission notes that standards similar to those developed by the
Committee of Sponsoring Organizations of the Treadway Commission or
the International Organization for Standardization are currently
among those that would reasonably be considered in the development
of an enterprise risk management program. Although different
standards may use different terminology for the same concept, these
standards have some commonalities, such as the statement of risk
appetite and the use of a risk register or logs to record any losses
or risks above a given threshold. These standards are noted here to
assist DCOs in identifying standards that they may wish to adopt or
consider in designing and implementing their risk management
frameworks; there may be other internationally-recognized standards
that may be used in addition to or instead of the standards
mentioned above. In the interests of transparency, a DCO should
specify the standards or industry best practices it uses as part of
its enterprise risk management program.
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The Commission has observed that some DCOs tend to ``silo''
responsibility for complying with their statutory and regulatory
obligations given the diverse nature of the relevant risks. For
example, risk management personnel might be primarily responsible for
compliance with Core Principle D, while information technology
personnel might be primarily responsible for managing the risks
addressed by Core Principle I. To ensure that the enterprise risk
management program is managed appropriately, the Commission is
proposing Sec. 39.10(d)(4), which would require a DCO to identify as
its enterprise risk officer an appropriate individual that exercises
the full responsibility and authority to manage the DCO's enterprise
risk management function.\25\
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\25\ The Commission is proposing to require that the DCO
``identify,'' rather than ``designate,'' the enterprise risk officer
because, for certain corporate structures, the enterprise risk
officer would most appropriately be an officer of a parent or other
affiliate of the DCO. As a result, the DCO may not always be the
entity that may properly ``designate'' the enterprise risk officer.
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The enterprise risk officer would be required to have the
authority, independence, resources, expertise, and access to relevant
information necessary to fulfil the responsibilities of such position.
The Commission believes that the independence of the enterprise risk
officer is a critical factor in allowing such officer to operate
effectively and has concerns about the potential for senior officers to
interfere with the enterprise risk officer's performance of his or her
responsibilities. The Commission requests comment regarding whether the
enterprise risk officer should be required to report directly to the
board of directors of the organization for which the enterprise risk
officer is responsible for managing the risks, whether such
organization is the DCO or its corporate parent or other affiliate. The
Commission also requests comment as to whether a DCO's chief risk
officer should be permitted to also serve as its enterprise risk
officer.
B. Financial Resources--Sec. 39.11
Regulation 39.11 implements Core Principle B, which requires a DCO
to possess financial resources that, at a minimum, exceed the total
amount that would enable the DCO to meet its financial obligations to
its clearing members notwithstanding a default by the clearing member
creating the largest financial exposure for the DCO in extreme but
plausible market conditions and to cover its operating costs for a
period of one year, as calculated on a rolling basis. The Commission is
proposing to revise or clarify several aspects of Sec. 39.11,
including revising the language of Sec. 39.11(a) to make it more
consistent with Core Principle B.
1. Calculation of Largest Financial Exposure and Stress Tests--Sec.
39.11(a)(1), (c)(1) and (2).
Regulation 39.11(a)(1) requires a DCO to maintain financial
resources sufficient to meet its financial obligations to its clearing
members notwithstanding a default by the clearing member creating the
largest financial exposure for the DCO in extreme but plausible market
conditions. Regulation 39.11(c)(1) requires a DCO to perform ``stress
testing'' in order to determine the
[[Page 22233]]
financial resources required to satisfy Sec. 39.11(a)(1). As an
initial matter, the Commission is proposing to change the wording to
``stress tests'' to use the term defined in Sec. 39.2. This is not
intended to change the meaning of Sec. 39.11(c)(1).
Although Sec. 39.11(c)(1) grants a DCO reasonable discretion in
determining the methodology used to calculate its financial resources
requirement, Commission staff has noted inconsistencies in how DCOs
treat excess collateral on deposit when conducting stress tests. These
inconsistencies lessen the usefulness of the stress tests. Accordingly,
the Commission is proposing additional minimum requirements that a DCO
would have to follow in determining its exposure in accordance with
Sec. 39.11(c)(1).
In particular, the Commission is proposing to add Sec.
39.11(c)(2)(i)(A) \26\ to require a DCO to calculate its largest
financial exposure net of the clearing member's required initial margin
amount on deposit. In other words, the DCO may not take into account
excess collateral on deposit or initial margin required but not yet
received. This would focus a DCO's analysis on the resources that would
actually be available to the DCO during times of stress and is
consistent with recent guidance issued by CPMI-IOSCO suggesting that
when assessing the adequacy of their financial resources, CCPs should
take into account only prefunded financial resources and ignore
voluntary excess contributions.\27\ Consistent with this change, the
Commission is proposing to remove Sec. 39.11(b)(1)(i), which permits
margin to be used to satisfy the requirements of Sec. 39.11(a)(1),
because the required initial margin amount on deposit for the clearing
member will be applied before determining the largest financial
exposure for the DCO in extreme but plausible market conditions.
Therefore, the margin would not be available to also cover the
exposure.
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\26\ The Commission is proposing to renumber current Sec.
39.11(c)(2) as Sec. 39.11(c)(3).
\27\ See CPMI-IOSCO, Resilience of central counterparties:
Further guidance on the PFMI (July 2017), Principles 4.2.4, 4.2.5,
available at https://www.bis.org/cpmi/publ/d163.pdf.
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Additionally, the Commission is proposing Sec. 39.11(c)(2)(ii) to
require that when stress tests produce losses in both customer and
house accounts, a DCO must combine the customer and house stress test
losses of each clearing member using the same stress test scenario.
Finally, the Commission is proposing several provisions designed to
ensure customer funds are treated properly when a DCO is calculating
its largest financial exposure. Proposed Sec. 39.11(c)(2)(i)(B) would
require a DCO to use customer initial margin only to the extent
permitted by parts 1 and 22 of the Commission's regulations. Proposed
Sec. 39.11(c)(2)(iii) would clarify that when calculating its largest
financial exposure, a DCO may net any gains in the house account with
customer losses, if permitted by the DCO's rules; however, a DCO may
not net losses in the house account with gains in the customer account.
Proposed Sec. 39.11(c)(2)(iv) would further clarify that, with respect
to a clearing member's cleared swaps customer account, a DCO may net
gains for one customer against losses for another customer only to the
extent permitted by the DCO's rules.
2. Assessments--Sec. 39.11(d)(2)
Regulation 39.11(d)(2) sets out certain conditions that apply to a
DCO's use of assessments for additional guaranty fund contributions in
calculating the financial resources available to meet its obligations
under Sec. 39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that the
DCO shall only count the value of assessments, after a 30 percent
haircut, ``to meet up to 20 percent of those obligations.'' The
Commission has been advised that the phrase ``those obligations,''
which is a reference to the obligations discussed in the introductory
language of Sec. 39.11(d)(2), has created some uncertainty. Therefore,
for clarity, the Commission is proposing to replace the phrase ``those
obligations'' with ``the total amount required under paragraph (a)(1)
of this section.''
3. Liquidity of Financial Resources--Sec. 39.11(e)
Regulation 39.11(e)(1)(ii) requires that the financial resources
allocated by a DCO to meet the requirements of Sec. 39.11(a)(1) (i.e.,
its default resources) be sufficiently liquid to enable the DCO to
fulfill its obligations as a central counterparty during a one-day
settlement cycle. Regulation 39.11(e)(1)(ii) further requires that
those resources include cash, U.S. Treasury obligations, or high
quality, liquid, general obligations of a sovereign nation (i.e., cash
or cash equivalents), in an amount greater than or equal to the average
of its clearing members' average pays over the last fiscal quarter.\28\
If that amount is less than what a DCO needs to fulfill its obligations
during a one-day settlement cycle, Sec. 39.11(e)(1)(iii) permits a DCO
to take into account a committed line of credit for the purpose of
meeting the remainder of the requirement.
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\28\ The Commission wishes to clarify that the cash, U.S.
Treasury obligations, or high quality, liquid, general obligations
of a sovereign nation required to be held under Sec.
39.11(e)(1)(ii) do not have to be attributable to the DCO's own
capital but can be attributable to any of the acceptable financial
resources included in Sec. 39.11(a)(1).
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The Commission's intention was to require that at least a portion
of a DCO's default resources be sufficiently liquid to enable the DCO
to complete a one-day settlement cycle and that these liquid resources
include a certain amount of cash or cash equivalents. Then, if the cash
or cash-equivalent amount was not sufficient to meet the total one-day
settlement cycle liquidity requirement, a DCO could use a committed
line of credit to make up the difference.\29\ Regulation 39.11(b)(1),
however, which sets forth the types of financial resources that can be
considered as default resources, does not expressly permit the use of a
committed line of credit; \30\ it does permit the use of ``[a]ny other
financial resource deemed acceptable by the Commission.'' The result is
that Sec. 39.11(b)(1) only permits a DCO to use a committed line of
credit as part of its default resources if ``deemed acceptable by the
Commission,'' while Sec. 39.11(e)(1)(iii) seems to permit a DCO to use
a committed line of credit as part of its default resources up to the
amount needed to satisfy the ``one-day settlement cycle'' liquidity
requirement after cash or cash equivalents have been applied.
Accordingly, the Commission is proposing Sec. 39.11(e)(3) to clarify
that a committed line of credit or similar facility is a permitted
default resource up to the amount provided for in Sec.
39.11(e)(1)(ii), provided, however, that it is not counted twice to
meet the requirements of Sec. 39.11(e)(1)(ii) and Sec.
39.11(e)(2).\31\ The Commission is also proposing clarifying changes to
the text of Sec. 39.11(e)(1)(iii) and (e)(2).
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\29\ See Financial Resources Requirements for Derivatives
Clearing Organizations, 75 FR 63113, 63116 (Oct. 14, 2010) (proposed
rule).
\30\ In the notice of proposed rulemaking for Sec. 39.11, the
Commission noted that a committed line of credit or similar facility
is not listed as a financial resource available to a DCO to satisfy
the requirements of Sec. 39.11(a)(1) and (2). The Commission
further noted that a DCO may use a committed line of credit or
similar facility only to meet the liquidity requirements set forth
in Sec. 39.11(e)(1) and (2). Id. See also Derivatives Clearing
Organization General Provisions and Core Principles, 76 FR at 69350
(affirming this approach).
\31\ The Commission is proposing to renumber current Sec.
39.11(e)(3) as Sec. 39.11(e)(4).
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In addition, the Commission is proposing to change references to
``daily settlement pay'' in Sec. 39.11(e)(1)(ii) to ``daily settlement
variation pay'' in order to clarify that additional calls for
[[Page 22234]]
initial margin should not be included in the calculation.
4. Reporting Requirements--Sec. 39.11(f)
Regulation 39.11(f) sets forth reporting requirements for DCOs
concerning the financial resources they are required to maintain
pursuant to Sec. 39.11(a). After Sec. 39.11(f) was adopted, the
Commission adopted Sec. Sec. 39.33(a) and 39.39(d), which set forth
financial resources requirements for SIDCOs and subpart C DCOs, and
financial resources requirements for the recovery and wind-down plans
of SIDCOs and subpart C DCOs, respectively. The Commission is proposing
to amend several provisions of Sec. 39.11(f) by adding the words ``and
Sec. Sec. 39.33(a) and 39.39(d), if applicable,'' to clarify that
financial resources reporting by SIDCOs and subpart C DCOs should
encompass all financial resources requirements applicable to them under
part 39.
5. Financial Statements--Sec. 39.11(f)(1)(ii)
Regulation 39.11(f)(1)(ii) requires a DCO to file with the
Commission each fiscal quarter, or at any time upon Commission request,
a financial statement, including the balance sheet, income statement,
and statement of cash flows, of the DCO or of its parent company. Since
Sec. 39.11(f)(1)(ii) was implemented, some DCOs have filed the
financial statements of their parent companies. Because some of these
DCOs are part of a complex corporate structure, Commission staff has
had difficulty determining whether the entity covered by a particular
financial statement is the true, direct parent of the relevant DCO,
which, in turn, makes it difficult to accurately assess the financial
strength of the DCO. Therefore, the Commission is proposing to revise
Sec. 39.11(f)(1)(ii) to require that the financial statement provided
be that of the DCO and not the parent company.
In further regard to Sec. 39.11(f)(1)(ii), the Commission has
received many inquiries concerning the accounting standards that apply
to the preparation of the DCO's financial statements. Generally,
Commission regulations require financial statements to be prepared in
accordance with U.S. generally accepted accounting principles (U.S.
GAAP).\32\ Therefore, the Commission would expect DCOs to provide
financial statements prepared in accordance with U.S. GAAP. However,
the Commission recognizes that DCOs organized outside the United States
may prepare their financial statements in accordance with International
Financial Reporting Standards (IFRS) issued by the International
Accounting Standards Board (IASB), or pursuant to other country-
specific accounting standards. The Commission has permitted commodity
pool operators to file commodity pool financial statements prepared in
accordance with IFRS if the pool is organized under the laws of a
foreign jurisdiction, and certain other conditions are met.\33\
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\32\ See, e.g., Sec. Sec. 1.10(d)(3), 4.22(d), and
38.1101(b)(1).
\33\ See Sec. 4.22(d)(2).
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The Commission notes that the Securities and Exchange Commission
(SEC) has adopted financial reporting requirements for securities
clearing agencies that require U.S. GAAP, but permit the use of IFRS by
clearing agencies that are ``incorporated or organized under the laws
of any foreign country.'' \34\ The SEC stated in its adopting release
that it also recognizes the ``advantages of financial statement
disclosure that are limited to more widely applied bases of accounting
and may offer more utility to market participants, regulators, and
other stakeholders of clearing agencies.'' \35\ Therefore, it limited
the different bases of accounting upon which annual audited financial
statements may be prepared to IFRS and U.S. GAAP.\36\
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\34\ 17 CFR 240.17Ad-22(c)(2)(ii).
\35\ Clearing Agency Standards, 77 FR 66220, 66244 (Nov. 2,
2012) (final rule).
\36\ See id.
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The Commission therefore is proposing to revise Sec.
39.11(f)(1)(ii) to clarify that the financial statement must be
prepared in accordance with U.S. GAAP for DCOs incorporated or
organized under U.S. law, and in accordance with either U.S. GAAP or
IFRS issued by the IASB for DCOs incorporated or organized under the
laws of any foreign country.
In reviewing DCOs' financial statements, Commission staff has noted
that assets allocated by the DCO to meet the requirements of Sec.
39.11(a)(1) or (2) often are not identified accordingly. The Commission
therefore is proposing in Sec. 39.11(f)(1)(ii) and (f)(2)(i)
(discussed below) to require that assets allocated by the DCO for such
purpose must be clearly identified on the DCO's balance sheet as held
for that purpose.
In addition, the Commission is proposing to renumber current Sec.
39.11(f)(2) as Sec. 39.11(f)(1)(iv) and amend it to incorporate the
language of current Sec. 39.11(f)(4), which requires a DCO to submit
its quarterly financial report no later than 17 business days after the
end of the DCO's fiscal quarter or at a later time as permitted by the
Commission in its discretion in response to a DCO's request for an
extension.
6. Annual Reporting--Sec. 39.11(f)(2)
The Commission is proposing to revise Sec. 39.11(f)(2) to set
forth a DCO's annual financial reporting requirements (currently set
forth in Sec. 39.19(c)(3)(ii), which would also be revised) in the
same way Sec. 39.11(f)(1) sets forth a DCO's quarterly financial
reporting requirements (which are cross-referenced in Sec.
39.19(c)(2)).
In addition to its audited year-end financial statement, a DCO
would be required to submit: (1) A reconciliation, including
appropriate explanations, of its balance sheet when material
differences exist between it and the balance sheet in the DCO's
financial statement for the last quarter of the fiscal year or, if no
material differences exist, a statement so indicating, and (2) such
further information as may be necessary to make the statements not
misleading. Commission staff has encountered situations in which
significant discrepancies exist between a DCO's financial statements
for the last quarter of its fiscal year and its audited year-end
financial statement. There is often a simple explanation for this,
e.g., the discrepancies reflect a material change in a given foreign
exchange rate. The Commission believes a reconciliation will help
explain these discrepancies and will aid its review of the DCO's
financial statements.
7. Documentation Requirements--Sec. 39.11(f)(3)
Current Sec. 39.11(f)(3) requires a DCO to provide to the
Commission certain documentation related to its quarterly financial
reporting.\37\ The Commission has determined that requiring this
documentation each quarter is unnecessary where there is no change from
the prior submission. Therefore, the Commission is proposing to revise
Sec. 39.11(f)(3) to clarify that a DCO must send the documentation to
the Commission required under current paragraphs (f)(3)(i) and (ii)
(proposed to be renumbered as paragraphs (f)(3)(i)(A) and (i)(B)) only
upon the DCO's first submission under Sec. 39.11(f)(1) and in the
event of any change thereafter.
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\37\ The documentation explains (1) the methodology used to
compute financial resources requirements, and (2) the basis for the
DCO's determinations regarding valuation and liquidity requirements.
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The Commission also is proposing to renumber Sec.
39.11(f)(3)(iii), which concerns providing copies of agreements
establishing or amending a credit facility, insurance coverage, or
other arrangement, as Sec. 39.11(f)(3)(ii),
[[Page 22235]]
and add language specifying that copies of the agreements should
evidence or support the DCO's ability to meet applicable financial
resources and liquidity resources requirements.
8. Certification--Sec. 39.11(f)(4)
After Sec. 39.11 was adopted, the Division advised DCOs that the
quarterly financial report required under paragraph (f) should be
accompanied by a certification as to the accuracy of the report signed
by the person responsible for the accuracy and completeness of the
report.\38\ Such certification is required for submission of annual
chief compliance officer reports and Form 1-FR by FCMs, and is also
appropriate in these circumstances.\39\ The Commission is proposing to
amend Sec. 39.11(f)(4) to add this new requirement.
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\38\ Memorandum to All Registered DCOs from Ananda
Radhakrishnan, Director, Division of Clearing and Risk, June 7,
2012.
\39\ See 17 CFR 39.10(c)(4)(ii) (requiring certification of
annual reports by chief compliance officers); 17 CFR 1.10(d)(4)
(requiring certification of financial reports submitted by FCMs and
introducing brokers); see also 17 CFR 4.22(h) (requiring commodity
pool operators to certify periodic and annual financial reports); 17
CFR 4.27(e)(1) (requiring commodity pool operators and commodity
trading advisors to certify periodic reports).
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C. Participant and Product Eligibility--Sec. 39.12
Regulation 39.12 implements Core Principle C, which requires a DCO
to establish admission and continuing eligibility standards for its
members, as well as standards for determining the eligibility of
agreements, contracts, or transactions submitted to the DCO for
clearing. Several provisions in Sec. 39.12 require a DCO to ``adopt''
or ``establish'' rules. The Commission is proposing to amend those
provisions to require a DCO to ``have'' rules.\40\
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\40\ The Commission is also proposing to renumber paragraphs
(a)(5)(i)(A) and (B) and (a)(5)(ii) of Sec. 39.12(a)(5) as
paragraphs (a)(5)(ii), (iii), and (iv), respectively.
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Regulation 39.12(b)(2) provides that a DCO shall adopt rules
providing that all swaps with the same terms and conditions are
economically equivalent within the DCO. The Commission recognizes that
some DCOs do not clear swaps and it was not the intention of the
Commission to require DCOs that do not clear swaps to adopt the rules
required under this provision. Therefore, the Commission is proposing
to revise Sec. 39.12(b)(2) so that it explicitly applies only to DCOs
that clear swaps.
D. Risk Management--Sec. 39.13
Regulation 39.13 implements Core Principle D, which establishes
risk management standards for DCOs. The Commission is proposing to
clarify several aspects of Sec. 39.13.
1. Risk Management Framework--Sec. 39.13(b)
Regulation 39.13(b) requires a DCO to establish and maintain
written policies, procedures, and controls, approved by its board of
directors, which establish an appropriate risk management framework.
The introductory heading to this provision states that it is a
``[d]ocumentation requirement.'' The Commission is proposing to replace
``[d]ocumentation requirement'' with ``[r]isk management framework''
and is also proposing to replace the words ``establish and maintain''
with ``have and implement'' to make it clear that a DCO is not only
required to have a documented risk management framework but to put it
into action.
2. Limitation of Exposure to Potential Default Losses--Sec. 39.13(f)
Regulation 39.13(f) requires a DCO to limit its exposure to
potential losses from clearing member defaults to ``ensure'' that the
DCO's operations would not be disrupted and non-defaulting clearing
members would not be exposed to unanticipated or uncontrollable losses.
The Commission recognizes that a DCO cannot ensure protection from that
which it cannot anticipate. Therefore, the Commission is proposing to
replace ``ensure'' with ``minimize the risk'' and make conforming
changes to paragraphs (f)(1) and (2) of Sec. 39.13.
3. Margin Requirements--Sec. 39.13(g)
a. Methodology and Coverage--Sec. 39.13(g)(2)
Regulation 39.13(g)(2)(i) requires that a DCO have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios. The regulation
currently notes that such risks ``include[ ] but [are] not limited to
jump-to-default risk or similar jump risk.'' The Commission is
proposing to amend Sec. 39.13(g)(2)(i) to note that such risks also
include ``concentration of positions.'' Recent events, including a
significant loss from a default at a central counterparty outside of
the Commission's jurisdiction, highlight the importance of addressing
those risks.
b. Independent Validation--Sec. 39.13(g)(3)
Regulation 39.13(g)(3) requires that a DCO's systems for generating
initial margin requirements, including its theoretical models, be
reviewed and validated by a qualified and independent party on a
regular basis. The provision further provides that the validation may
be conducted by independent contractors or employees of the DCO, as
long as they are not responsible for the development or operation of
the systems and models being tested. The Commission is proposing to
amend this provision to specify that ``on a regular basis'' means
annually and to also permit employees of an affiliate of the DCO to
conduct the validations. Based on experience since the provision was
adopted, the Commission believes an annual validation is sufficient.
The Commission also believes it is appropriate to permit employees of
an affiliate of the DCO to conduct the validations because, as with
independent contractors or employees of the DCO, the main concern is
that they not be persons responsible for development or operation of
the systems and models being tested.
c. Spreads and Portfolio Margins--Sec. 39.13(g)(4)
The Commission is amending Sec. 39.13(g)(4) to substitute the
phrase ``conceptual basis'' for the phrase ``theoretical basis'' in the
discussion of spread margin. This change would not alter the meaning of
the rule but would simply make the terminology consistent with that
used in the other Commission regulations.\41\
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\41\ See Margin Requirements for Uncleared Swaps for Swap
Dealers and Major Swap Participants, 81 FR 636, 658 (Jan. 6, 2016).
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d. Back Tests--Sec. 39.13(g)(7)
The Commission is proposing new Sec. 39.13(g)(7)(iii) to clarify
that, in conducting back tests of initial margin requirements, a DCO
should compare portfolio losses only to those components of initial
margin that capture changes in market risk factors.
e. Gross Customer Margin--Sec. 39.13(g)(8)(i)
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). After
the regulation was adopted, Division staff received several inquiries
regarding whether the provision applied to intraday settlements as well
as end-of-day settlements. In response, the Division advised DCOs that
the provision requires a DCO to collect
[[Page 22236]]
customer initial margin on a gross basis during any settlement cycle
(end-of-day or intraday) in which the DCO collects customer initial
margin. The Division also asked DCOs to notify the Division, in
writing, of any issues that could prevent a DCO from fully complying
with this requirement.\42\
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\42\ Memorandum to All Registered DCOs from Ananda
Radhakrishnan, Director, Division of Clearing and Risk, July 19,
2012.
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Although Sec. 39.13(g)(8)(i) does not differentiate between end-
of-day and intraday collections of customer initial margin, there are
significant operational issues that may affect the ability of clearing
members to accurately determine the positions of individual customers
on an intraday basis with respect to certain types of transactions
(e.g., transfers, give-ups, and allocations of block orders) and with
respect to certain types of market participants (e.g., locals and high
frequency traders). Therefore, intraday gross margin calculations may
result in some clearing members being charged too much margin and
others being charged too little margin, which could necessitate
significant end-of-day adjustments.
Regulation 39.13(g)(8)(i) is premised upon the ability of a DCO to
accurately determine the initial margin amounts that would be required
for each individual customer if each individual customer were a
clearing member. Accordingly, the Commission is proposing to amend
Sec. 39.13(g)(8)(i) to require a DCO to collect customer initial
margin from its clearing members on a gross basis only during its end-
of-day settlement cycle, in light of the operational issues that may
arise intraday. However, the Commission strongly encourages DCOs to
collect customer initial margin from their clearing members on a gross
basis during any intraday settlement cycle in which the DCOs collect
customer initial margin, if they are able to calculate the margin
accurately. The Commission requests comment as to whether this is the
correct approach or whether there are other alternatives that would
address the collection of intraday gross margin.
Currently, Sec. 39.13(g)(8)(i)(B) provides that for purposes of
calculating the gross initial margin requirement for clearing members'
customer accounts, to the extent not inconsistent with other Commission
regulations, a DCO may require its clearing members to report the gross
positions of each individual customer to the DCO, or it may permit each
clearing member to report the sum of the gross positions of its
customers to the DCO. Regulation 39.13(g)(8)(i)(C) further provides
that for purposes of paragraph (g)(8), a DCO may rely, and may permit
its clearing members to rely, upon the sum of the gross positions
reported to the clearing members by each domestic or foreign omnibus
account that they carry, without obtaining information identifying the
positions of each individual customer underlying such omnibus accounts.
In addition, Sec. 39.19(c)(5)(iii) currently requires a DCO to file
with the Commission, for each customer origin of each clearing member,
the end-of-day gross positions of each beneficial owner, upon
Commission request.
The Commission believes the ability to analyze positions at the
customer level is a crucial element of an effective risk surveillance
program. For example, a clearing member account that is composed of
1,000 customers each holding one contract poses substantially less
financial risk to the clearing member and to the DCO than a clearing
member account composed of one customer holding 1,000 contracts. The
ability to identify those customers whose positions create the most
risk to a DCO's clearing members would assist the Commission in
determining whether adequate measures are in place to address those
risks and whether the Commission needs to take proactive steps to see
that those risks are mitigated.
When the part 39 regulations were adopted, the Commission
determined to allow a DCO to permit its clearing members to report the
sum of the gross positions of their customers to the DCO without
obtaining information identifying the positions of each individual
customer underlying such clearing members' omnibus accounts. The
Commission also determined not to require routine reporting of end-of-
day gross positions of each beneficial owner to the Commission, in part
because of concerns about the difficulty that DCOs would have in
obtaining this information.\43\ Subsequently, however, the Commission
adopted Sec. 22.11(c), which requires FCMs to report customer
information about swaps to DCOs.\44\ Thus, for swaps, DCOs now have
data that they did not have fully available to them at the time part 39
was adopted. Moreover, the Commission has established a reporting
protocol for this data, which can be used for submitting futures data
as well.
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\43\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69375, 69400.
\44\ Protection of Cleared Swaps Customer Contracts and
Collateral; Conforming Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336, 6376 (Feb. 7, 2012) (codified at 17 CFR 22).
---------------------------------------------------------------------------
To avoid a potential regulatory gap, the Commission is proposing to
require a DCO to have rules requiring its clearing members to report
customer information about futures (as well as swaps) to DCOs. This
will enable DCOs, in turn, to report this information to the
Commission, as discussed further below with respect to the proposed
amendment to Sec. 39.19(c)(1)(i)(D). Specifically, the proposed
amendments to Sec. 39.13(g)(8)(i)(B) would require a DCO to have rules
that require its clearing members to provide reports to the DCO each
day setting forth end-of-day gross positions of each beneficial owner
within each customer origin of the clearing member.\45\
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\45\ In this regard, the Commission is also proposing to amend
Sec. 39.13(g)(8)(i)(B) by changing ``may'' to ``shall,'' deleting
``to the extent not inconsistent with other Commission regulations''
and ``or it may permit each clearing member to report the sum of the
gross positions of its customers to the derivatives clearing
organization,'' deleting paragraph (C), and renumbering paragraphs
(D) and (E).
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f. Customer Initial Margin Requirements--Sec. 39.13(g)(8)(ii)
Regulation 39.13(g)(8)(ii) provides that a DCO must require its
clearing members to collect customer initial margin from their
customers, ``for non-hedge positions, at a level that is greater than
100 percent of the [DCO]'s initial margin requirements with respect to
each product and swap portfolio.'' Historically, DCMs had set customer
initial margin requirements for their FCM members,\46\ and the
Commission stated that this provision simply shifts the responsibility
for establishing customer initial margin requirements from DCMs to
DCOs.\47\ The Commission also noted its belief that requiring an FCM to
collect higher customer initial margin for ``non-hedge positions''
provides a valuable cushion of readily available customer margin
collateral.\48\
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\46\ The Commission is proposing to amend Sec. 39.13(g)(8)(ii)
and (iii) to clarify that these provisions apply to FCM clearing
members only.
\47\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69377.
\48\ Id. at 69378.
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After Sec. 39.13(g)(8)(ii) was adopted, the Division issued
interpretative guidance addressing several aspects of the regulation in
response to a request from Chicago Mercantile Exchange, Inc. (CME), a
registered DCO.\49\ The Commission is proposing to amend Sec.
39.13(g)(8)(ii) in a manner consistent
[[Page 22237]]
with the interpretative guidance provided in the Division's letter, as
discussed further below.
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\49\ CFTC Letter No. 12-08 (Sept. 14, 2012); see also Letter
from Lisa Dunsky, Executive Director and Associate General Counsel,
Chicago Mercantile Exchange Inc., to Ananda Radhakrishnan, Director,
Division of Clearing and Risk (Aug. 29, 2012).
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In its request, CME asked for clarification as to the meaning of
the term ``non-hedge positions.'' CME explained that DCM requirements
for collection of higher customer initial margin had been applied
historically on an account, rather than a position, basis. Under
existing rules or practices at various DCMs, exchange members, market
makers, market professionals, and certain other categories of customers
had been subject to the clearing initial margin requirement; i.e., such
exchange member accounts were designated as ``hedge'' or ``member,''
and by virtue of this designation, received the lower clearing initial
margin rate, even though there may have been speculative positions in
the accounts.
CME also inquired as to the applicability of Sec. 39.13(g)(8)(ii)
to non-clearing FCM customer omnibus accounts at clearing FCMs. CME
stated that a non-clearing FCM's customer omnibus account may be
comprised of both hedge accounts and speculative accounts, and the
clearing FCM typically did not know the identity of the underlying
customers in a non-clearing FCM's omnibus account. The non-clearing FCM
sets customer initial margin requirements based on whether a customer
account is designated as ``hedge'' or ``speculative.'' Thus, a
speculative account included within an omnibus account already would
have been assessed the higher customer initial margin requirement by
such customer's non-clearing FCM. If the clearing FCM were required to
apply the higher customer initial margin rate to the entire customer
omnibus account, this would require the non-clearing FCM to either (1)
post more collateral with the clearing FCM than the amount actually
collected from its hedge customers in the omnibus account, or (2)
collect the higher customer initial margin requirement from its hedge
customers so that it could post this collateral with the clearing FCM.
In its response to CME's request, the Division stated that it
interprets Sec. 39.13(g)(8)(ii) ``in a manner that preserves the
historical customer margining practices applicable to FCMs . . .
[noting that] FCMs are expected to continue the practice of collecting
customer initial margin at a level higher than the minimum required, if
such action is warranted based on the unique risk profile of an
individual customer.'' The Commission agrees with such interpretation
and accordingly, is proposing to revise Sec. 39.13(g)(8)(ii) to permit
DCOs to continue the practice of establishing customer initial margin
requirements based on the type of customer account and by applying
prudential standards that result in FCMs collecting customer initial
margin at levels commensurate with the risk presented by each customer
account.
The Commission therefore proposes to amend Sec. 39.13(g)(8)(ii) by
deleting the reference to ``non-hedge'' positions, changing the
reference to ``a level that is greater than 100 percent'' to ``a level
that is not less than 100 percent,'' clarifying that the customer
initial margin level is measured against ``clearing'' initial margin
requirements, and explicitly stating that customer initial margin
levels must be ``commensurate with the risk presented by each customer
account.''
The Commission believes that establishing a bright-line test to
determine the appropriate percentage by which customer initial margin
requirements must exceed clearing initial margin requirements with
respect to any particular types of customer accounts is inappropriate
because the circumstances for each DCO and the nature of its clearing
members and their customers vary. In adopting Sec. 39.13(g)(8)(ii),
the Commission noted that the percentage ``should be based on the
nature and volatility patterns of the particular product or swap
portfolio, and the DCO's related evaluation of the potential risks
posed by customers in general to their clearing members and, in turn,
the potential risks posed by such clearing members in general to the
DCO, rather than the creditworthiness of particular customers.'' \50\
The Commission requests comment as to whether it should add standards
or further direction in Sec. 39.13(g)(8)(ii), or provide guidance to
further clarify what would be considered ``commensurate with the risk
presented,'' similar to the Commission's statement in the adopting
release noted above.
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\50\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69378.
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The Commission is proposing to amend the language in Sec.
39.13(g)(8)(ii) that gives the DCO reasonable discretion in determining
the percentage by which customer initial margin requirements must
exceed the DCO's clearing initial margin requirements with respect to
particular products or portfolios, by replacing ``the percentage by
which'' with ``whether and by how much.'' However, the proposed
amendments to Sec. 39.13(g)(8)(ii) would give the Commission the
ability to require different customer initial margin levels if the
Commission deems the levels insufficient to protect the financial
integrity of the DCO or its clearing members. Since the adoption of
Sec. 39.13(g)(8)(ii), DCOs have typically added a 10 percent increase
to the clearing initial margin requirement to set the higher customer
initial margin requirement. The Commission has generally found this to
be adequate in ordinary market conditions.
g. Haircuts--Sec. 39.13(g)(12)
Regulation 39.13(g)(12) requires a DCO to apply appropriate
reductions in value to reflect credit, market, and liquidity risks
(haircuts), to the assets that it accepts in satisfaction of initial
margin obligations. This provision also requires a DCO to evaluate the
appropriateness of the haircuts ``on at least a quarterly basis.''
Regulation 39.11(d)(1) requires that haircuts be evaluated on a monthly
basis for assets that are used to meet the DCO's financial resources
obligations set forth in Sec. 39.11(a). The Commission is proposing to
amend Sec. 39.13(g)(12) to align it with Sec. 39.11(d)(1) by
requiring that DCOs evaluate the appropriateness of the haircuts that
they apply to assets accepted in satisfaction of initial margin
obligations on a monthly basis. Given that initial margin is held for
risk management purposes, and the value of these assets change
frequently, the Commission believes it would be more appropriate to
assess haircuts more frequently.
4. Other Risk Control Mechanisms--Sec. 39.13(h)
a. Risk Limits--Sec. 39.13(h)(1)
Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the DCO's financial resources. The Commission
is proposing to clarify that such risk limits should also be imposed to
address positions that may be difficult to liquidate. This might be the
case, for example, in instances where a position in a particular
contract or swap is concentrated with a particular member, such that
there is reason to doubt whether, in the event that this member
defaults, other members would be willing and able to accept,
collectively, the entirety of that position or swap. As noted above, in
section IV.D.3.a, recent events highlight the importance of imposing
risk limits to address positions that may be difficult
[[Page 22238]]
to liquidate, particularly concentrated positions.
b. Clearing Members' Risk Management Policies and Procedures--Sec.
39.13(h)(5)
Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis,
review the risk management policies, procedures, and practices of each
of its clearing members, which address the risks that such clearing
members may pose to the DCO, and to document such reviews. The
Commission is proposing to clarify that DCOs should, having conducted
such reviews, ``take appropriate actions to address concerns identified
in such reviews,'' and that the documentation of the reviews should
include ``the basis for determining what action was appropriate to
take.'' The Commission notes that, where a DCO is required to conduct
any type of review under Commission regulations, similar remediation
and documentation is expected. Absent such follow-up, the reviews would
lack purpose.
5. Cross-Margining Arrangements--Sec. 39.13(i)
A cross-margining arrangement allows a DCO to provide offsets or
reductions in required margin between products that it and another DCO
(or other clearing organization) clear if the risk of one product is
significantly and reliably correlated with the risk of the other
product. The Commission approved the first cross-margining arrangement
in 1988, and it has approved many such arrangements since.\51\ Proposed
Sec. 39.13(i) would codify the Commission's existing practices for
evaluating cross-margining arrangements.\52\
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\51\ The Commission has issued a number of cross-margining
program orders, including, but not limited to: A June 1, 1988 order
approving a proprietary cross-margining system between the
Intermarket Clearing Corporation (ICC) and Options Clearing
Corporation (OCC), as expanded by a November 26, 1991 order
approving the addition of cross-margining of positions of market
professionals in non-proprietary accounts of participating clearing
members to the ICC/OCC cross-margining program, 56 FR 61406 (Comm.
F. T. Comm'n Dec. 3, 1991), and as further amended by a January 22,
1996 order to incorporate the provisions of appendix B, Framework 1
to the Commission's part 190 Regulations; a September 26, 1989 order
approving a proprietary cross-margining system between OCC and CME,
as expanded by a November 26, 1991 order approving the addition of
cross-margining of positions of market professionals in non-
proprietary accounts of participating clearing members to the OCC/
CME cross-margining program, 56 FR 61404 (Comm. F. T. Comm'n Dec. 3,
1991); a June 2, 1993 order approving the proposals of CME and ICC
to implement a tri-lateral cross-margining program with OCC, as
further amended by a January 22, 1996 amended order to reflect the
approval of proposed changes to the CME/ICC/OCC cross-margining
amendments for proprietary and market professional accounts to
incorporate the provisions of appendix B, Framework 1 to the
Commission's part 190 Regulations; a November 5, 2004 order
approving the establishment of an internal cross-margining program
that permits cross-margining of positions of market professionals in
internal non-proprietary accounts of OCC clearing members; and a
February 29, 2008 order approving the establishment of a non-
proprietary cross-margining agreement between the OCC and ICE Clear
US, Inc. The Commission has also allowed cross-margining programs
into effect without Commission approval including, but not limited
to, a proprietary cross-margining program between CME and the London
Clearing House (allowed into effect without approval on March 23,
2000).
\52\ In February 2015, CPMI-IOSCO issued a Level 2 assessment
report on implementation of the PFMIs by CCPs and trade repositories
in the U.S. (Implementation Report). See CPMI-IOSCO, Implementation
monitoring of PFMIs: Level 2 assessment report for central
counterparties and trade repositories--United States (Feb. 2015),
available at https://www.bis.org/cpmi/publ/d126.pdf. The
Implementation Report noted that Commission regulations do not
explicitly address cross-margining, and in particular, the risk
management requirements necessary where two or more CCPs participate
in cross-margining arrangements. The Commission notes that existing
DCO Core Principles and regulations regarding risk management,
treatment of customer funds, default and settlement procedures,
taken as a whole, address cross-margining arrangements.
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In evaluating cross-margining arrangements, the Commission reviews:
(1) The methodology to be used to calculate margin requirements for the
positions subject to the cross-margining arrangement; (2) the
correlation between the positions, including the stability of the
relationship among the eligible products and the potential impact a
change in the correlation could have on setting margin requirements;
(3) the impact on the settlement process; and (4) the application of
default procedures, including any loss-sharing arrangements, pursuant
to the proposed arrangement. If only one of the clearing organizations
participating in the arrangement is a registered DCO, the Commission
looks at additional factors, including the other clearing
organization's status with and oversight by other regulator(s). Also,
if one of the clearing organizations is organized outside of the United
States, the Commission evaluates the bankruptcy treatment in that
clearing organization's jurisdiction. Finally, the Commission considers
the impact of the cross-margining arrangement, if any, on the DCO's
ability to comply with the DCO Core Principles, particularly those
concerning financial resources and risk management. The Commission
requests comment as to whether there are other factors the Commission
should consider and, therefore, other information that it should
request. The Commission is proposing to require a DCO to provide the
relevant information needed to facilitate its review as part of a rule
filing submitted for Commission approval pursuant to Sec. 40.5. The
Commission requests comment as to whether this would be the appropriate
process or whether a more or less detailed review process is
appropriate given the factors and risks involved.
E. Treatment of Funds--Sec. 39.15
Regulation 39.15 implements Core Principle F, which requires a DCO
to establish standards and procedures designed to protect its clearing
members' funds, hold such funds in a manner that would minimize the
risk of loss or delay in the DCO's access, and invest such funds in
instruments with minimal credit, market, and liquidity risks. The
Commission is proposing to amend certain aspects of Sec. 39.15.
1. Segregation of Customer Funds--Sec. 39.15(b)(1)
Regulation 39.15(b)(1) requires a DCO to comply with the applicable
segregation requirements of section 4d of the CEA and Commission
regulations thereunder, or any other applicable Commission regulation
or order requiring that customer ``funds and assets'' be segregated,
set aside, or held in a separate account. Section 4d of the CEA refers
to customer ``money, securities and property.'' Therefore, the
Commission is proposing to amend Sec. 39.15(b) to clarify that ``funds
and assets'' are equivalent to ``money, securities, and property'' in
order to better align the language of the regulation with the language
in the statute.
2. Commingling in Cleared Swaps Customer Account--Sec. 39.15(b)(2)(i)
Regulation 39.15(b)(2)(i) requires a DCO to file rules for
Commission approval pursuant to Sec. 40.5 in order for the DCO and its
clearing members to commingle customer positions in futures, options,
and swaps, and any money, securities, or property received to margin,
guarantee or secure such positions, in an account subject to the
requirements of section 4d(f) of the CEA (i.e., the cleared swaps
customer account). The Commission is proposing to revise Sec.
39.15(b)(2)(i) to clarify that a DCO that wants to commingle foreign
futures and foreign options with swaps must meet the same requirements.
3. Commingling in Futures Customer Account--Sec. 39.15(b)(2)(ii)
Regulation 39.15(b)(2)(ii) requires a DCO to file a petition for an
order pursuant to section 4d(a) of the CEA in order for the DCO and its
clearing members to commingle customer positions in futures, options,
and swaps, and any money, securities, or property
[[Page 22239]]
received to margin, guarantee or secure such positions, in an account
subject to the requirements of section 4d(a) of the CEA. The Commission
is proposing to revise Sec. 39.15(b)(2)(ii) to clarify that a DCO that
wants to commingle foreign futures and foreign options with futures and
options must meet the same requirements as a DCO that wants to
commingle swaps with futures and options.
Further, when Sec. 39.15(b)(2)(ii) was first promulgated, the
Commission, in reference to its decision to require an order rather
than a rule approval to commingle cleared swaps with futures in a
futures account, stated ``at this time, it is appropriate to provide
these additional procedural protections before exposing futures
customers to the risks of swaps that may be commingled in a futures
account.'' \53\ The Commission, however, acknowledged that ``as the
Commission and the industry gain more experience with cleared swaps,
the Commission may revisit this issue in the future.'' \54\ The
Commission now believes that a request for a rule approval that
complies with Sec. 40.5 will provide the Commission with sufficient
means to determine whether customer funds held in a futures account
will be adequately protected if cleared swaps, foreign futures, or
foreign options are also held in the account.
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\53\ Derivatives Clearing Organization General Provisions and
Core Principles, 76 FR at 69392.
\54\ Id.
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Therefore, the Commission is proposing to revise Sec.
39.15(b)(2)(ii) to require a DCO to file rules for Commission approval
pursuant to Sec. 40.5 in order for the DCO and its clearing members to
commingle swaps, foreign futures, or foreign options with futures and
options in an account subject to the requirements of section 4d(a) of
the CEA.
4. Commission Action--Sec. 39.15(b)(2)(iii)
Regulation 39.15(b)(2)(iii) provides that the Commission may
``grant approval of'' a rule submission filed under Sec.
39.15(b)(2)(i) in accordance with Sec. 40.5. The Commission is
proposing to replace the words ``grant approval of'' with ``approve''
in order to be consistent with the language used in Sec. 40.5(b).
Further, the Commission is proposing to amend Sec. 39.15(b)(2)(iii) to
reflect the proposed changes to Sec. 39.15(b)(2)(ii). Specifically,
the Commission is proposing to eliminate Sec. 39.15(b)(2)(iii)(A) and
(B) and include the content of both paragraphs within Sec.
39.15(b)(2)(iii).
5. Transfer of Customer Positions--Sec. 39.15(d)
Regulation 39.15(d) requires a DCO to have rules providing for the
prompt transfer of all or a portion of a customer's portfolio of
positions and related funds at the same time from the carrying clearing
member to another clearing member, without requiring the close-out and
re-booking of the positions prior to the requested transfer.
Some DCOs have noted that, although a DCO may transfer positions
from one clearing member to another, the DCO does not generally
transfer funds. The DCO simply adjusts the amount of margin due from,
or owed to, each clearing member during the next collection cycle.
Moreover, the receiving clearing member may not owe additional funds if
it has sufficient excess margin funds on deposit at the DCO. The DCO
may only transfer funds if it has already collected variation margin
from the transferring clearing member and positions were transferred at
the trade price. In addition, any excess margin held by the
transferring clearing member would be transferred to the receiving
clearing member.
Accordingly, the Commission is proposing to amend Sec. 39.15(d) to
delete the words ``at the same time,'' thus requiring the ``prompt,''
but not necessarily simultaneous, transfer of a customer's positions
and related funds. The Commission is further amending the provision to
require the transfer of related funds ``as necessary,'' recognizing
that the transfer of customer positions will not always require the
transfer of funds.
6. Permitted Investments--Sec. 39.15(e)
Regulation 39.15(e) requires any investment of customer funds or
assets by a DCO to comply with Sec. 1.25, as if all such funds and
assets comprise customer funds subject to segregation pursuant to
section 4d(a) of the CEA and Commission regulations thereunder. At the
time Sec. 39.15(e) was adopted, the Commission had not yet adopted
regulations concerning cleared swaps customer funds but intended for
Sec. 39.15(e) to also apply to those funds. The Commission has since
adopted the part 22 regulations and therefore is proposing to amend
Sec. 39.15(e) to clarify that the requirement applies to any
investment of customer funds or assets, including cleared swaps
customer collateral as defined in Sec. 22.1.
F. Default Rules and Procedures--Sec. 39.16
Regulation 39.16 codifies Core Principle G, which requires a DCO to
have rules and procedures designed to allow for the efficient, fair,
and safe management of events during which a clearing member becomes
insolvent or otherwise defaults on its obligations to the DCO. Core
Principle G also requires a DCO to clearly state its default
procedures, make its default rules publicly available, and ensure that
it may take timely action to contain losses and liquidity pressures
while continuing to meet its obligations. The Commission is proposing
to amend certain aspects of Sec. 39.16.\55\
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\55\ The proposed amendments to Sec. 39.16 include replacing
``adopt'' with ``have'' where a DCO is required to adopt rules,
consistent with the proposed changes to Sec. 39.12 previously
discussed.
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1. Default Management Plan--Sec. 39.16(b)
Regulation 39.16(b) requires a DCO to have a default management
plan and, among other things, test the plan at least on an annual
basis. A DCO's default management plan involves its clearing members,
so the Commission believes the plan cannot be tested effectively
without the clearing members' participation. Accordingly, the
Commission is proposing to amend Sec. 39.16(b) to add a requirement
that the DCO include clearing members in a test of its default
management plan on at least an annual basis. A DCO should ensure that a
sufficient portion of its clearing membership participates in such
testing and is therefore prepared to support the DCO's default
management efforts.
2. Default Procedures--Sec. 39.16(c)
Regulation 39.16(c) requires a DCO to adopt procedures that would
permit the DCO to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default by one if its clearing members. The Commission is proposing to
amend Sec. 39.16(c)(1) to require a DCO to have a default committee
that would be convened in the event of a default involving substantial
or complex positions to help identify market issues with any action the
DCO is considering. The default committee would be required to include
clearing members and could include other participants to help the DCO
efficiently manage the house or customer positions of the defaulting
clearing member.
The Commission also is proposing to amend Sec. 39.16(c)(2)(ii) to
require that a DCO have default procedures that include immediate
public notice on the DCO's website of a declaration of default. The
Commission believes it is important to the integrity and stability of
the financial markets that clearing members, other CCPs, and the public
[[Page 22240]]
become aware as soon as possible when a default has occurred. The
Commission requests comment, however, as to whether the timing of the
announcement would potentially impact the market or the DCO's ability
to manage the default.
Finally, Sec. 39.16(c)(2)(iii)(C) requires any allocation of a
defaulting clearing member's positions to be proportional to the size
of the participating or accepting clearing member's positions in the
same product class at the DCO. The Commission is proposing to amend
this provision to clarify that the DCO shall not require a clearing
member to bid for a portion of, or accept an allocation of, the
defaulting clearing member's positions that is not proportional to the
size of the bidding or accepting clearing member's positions in the
same product class at the DCO. This is intended to clarify that a
clearing member that wishes to voluntarily bid for or accept more than
its proportional share should be allowed to do so, provided that the
clearing member has the ability to manage the risk of the new
positions.
The Commission is proposing to further amend Sec.
39.16(c)(2)(iii)(C) in order to clarify that the provision applies to
both auctions and allocations and to provide that the size of the
participating or accepting clearing member's positions in the same
product class at the DCO should be measured by the clearing initial
margin requirement for those positions. The Commission requests comment
as to whether the Commission should require DCOs to take into
consideration other indicators of active participation in a market,
such as open interest, volume, and/or other criteria.
G. Rule Enforcement--Sec. 39.17
Regulation 39.17(a) codifies Core Principle H, which requires a DCO
to maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance with its rules and dispute
resolution. Core Principle H also requires a DCO to have the authority
and ability to discipline, limit, suspend, or terminate the activities
of a member or participant if it violates the DCO's rules. Finally,
Core Principle H requires a DCO to report its rule enforcement
activities and sanctions imposed on members and participants to the
Commission. The Commission is proposing to amend Sec. 39.17(a)(1) to
clarify the Commission's expectation that DCOs currently do, and will
continue to, ensure that both the DCO and its members comply with the
DCO's rules.
Regulation 39.17(b) permits a DCO's board of directors to delegate
its responsibility for compliance with the requirements of Sec.
39.17(a) to the DCO's risk management committee. The Commission
recognizes that some DCOs delegate such responsibility to a committee
other than the risk management committee. Therefore, the Commission is
proposing to amend Sec. 39.17(b) to replace ``risk management
committee'' with ``an appropriate committee.''
H. Reporting--Sec. 39.19
Regulation 39.19 implements Core Principle J, which requires that
each DCO provide to the Commission all information that the Commission
determines to be necessary to conduct oversight of the DCO. In addition
to clarifying existing requirements, the Commission is proposing to
adopt additional reporting requirements that would allow the Commission
to conduct more effective oversight of DCO compliance with the DCO Core
Principles and Commission regulations.
1. General--Sec. 39.19(a)
The Commission is proposing to revise the text of Sec. 39.19(a) to
match the text of Core Principle J. The proposed revisions are not
meant to alter the meaning of the provision.
2. Submission of Reports--Sec. 39.19(b)
Regulation 39.19(b)(1) requires a DCO to submit the information
required by the section to be submitted to the Commission
electronically and in a format and manner specified by the Commission,
unless otherwise specified by the Commission or its designee. The
Commission is proposing to delete ``[u]nless otherwise specified by the
Commission or its designee'' and ``electronically,'' requiring a DCO to
submit the information in a format and manner specified by the
Commission. This would simplify the text while retaining the
flexibility the Commission originally intended. The Commission is
proposing new Sec. 39.19(b)(2) to require that when making a
submission pursuant to the section, an employee of a DCO must certify
that he or she is duly authorized to make such a submission on behalf
of the DCO. This provision would codify existing practices with respect
to the use of the CFTC Portal for submissions pursuant to Sec. 39.19.
Finally, the Commission is proposing to remove existing Sec.
39.19(b)(3) and move the definition of ``business day'' to Sec. 39.2,
as previously discussed. Existing Sec. 39.19(b)(2) would be renumbered
as Sec. 39.19(b)(3).
3. Daily Reporting of Information--Sec. 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a DCO to report to the
Commission on a daily basis margin, cash flow, and position information
for each clearing member, by house origin and by each customer origin.
The Commission is proposing to amend Sec. 39.19(c)(1)(i) to require a
DCO to additionally report margin, cash flow, and position information
by individual customer account, which is information the DCOs currently
provide. The Commission is specifying ``individual customer account,''
as individual customers may have multiple accounts, which should be
reported separately. The Commission is also proposing to have DCOs
provide any legal entity identifiers and internally-generated
identifiers within each customer origin for each clearing member. The
Commission is also proposing to amend Sec. 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day positions, DCOs must report
the positions themselves (i.e., the long and short positions) as well
as risk sensitivities and valuation data for these positions.
Risk-sensitivities are different measures of the impact of changes
in underlying factors on the value of the positions. For example, an
interest rate delta describes the theoretical profit or loss (``P&L'')
that results from a one basis point increase in a currency's interest
rate curve. A delta ladder describes a series of sensitivities for
different maturity points (tenors) where each ``rung'' represents an
increasing maturity point or tenor along the zero rate curve term
structure. Each value on the rung represents the P&L that the portfolio
would experience if the interest rate for that tenor were to increase
by one basis point, all else being equal. Thus, if the entire curve
were to shift up by one basis point, the portfolio's theoretical P&L
would be equal to the sum of all the individual sensitivities. In the
context of options, examples of risk sensitivities would be the
different Greeks--delta measures an option's price sensitivity relative
to changes in the price of the underlying asset, gamma measures the
sensitivity of delta in response to price changes in the underlying
instrument, vega measures an option's sensitivity to changes in the
volatility of the underlying, theta measures the time decay of an
option.
Valuation data refer to variables and inputs that reflect current
market conditions, as well as expectations for the future. In the case
of credit default swaps, valuation models rely on for example, risk
neutral default
[[Page 22241]]
probabilities of swaps, forward credit spreads for different
maturities. For interest rate swaps, valuation models require discount
factors.
The Commission intends to implement a range of different
methodologies to conduct risk surveillance of cleared derivatives
exposures, some involving full revaluation of portfolios and others
relying on delta ladders and other risk sensitivities. Collectively,
the enhanced information sets will enable Commission staff to run
stress tests; identify concentration and risk in currencies and in
maturity buckets; perform back testing; validate guaranty funds; and
validate variation margin.
4. Daily Reporting on Securities Positions--Sec. 39.19(c)(1)(ii)(C)
Regulation 39.19(c)(1)(i) requires DCOs to submit certain
information to the Commission on a daily basis, e.g., initial margin
requirements, initial margin on deposit, daily variation margin, other
daily cash flows such as option premiums, and end-of day positions.
Paragraph (c)(1)(ii)(C) further instructs DCOs to provide the required
information for all securities positions that are held in a customer
account subject to section 4d of the CEA or are subject to a cross-
margining agreement. Paragraph (c)(1)(ii)(C) was added to clarify the
applicability of daily reporting requirements to securities positions
carried by FCMs that are also registered broker-dealers.
Since the adoption of Sec. 39.19(c)(1), the Commission has become
aware of a potential ambiguity in the wording of paragraph
(c)(1)(ii)(C), which requires the reporting of all securities positions
``that are held in a customer account subject to section 4d of the Act
or are subject to a cross-margining agreement.'' The ambiguity concerns
whether the reporting requirement for securities positions subject to a
cross-margining agreement applies to customer positions only or to any
position subject to a cross-margining agreement, whether house or
customer.
Reporting of securities positions is designed to capture positions
that could have an impact on the risks a DCO must manage. Because risks
associated with securities positions subject to a cross-margining
agreement would be relevant to the DCO's risk management function and
therefore the Commission's risk surveillance program, all such
securities positions, whether house or customer, were intended to be
included in daily reporting. In order to avoid ambiguity and more
precisely articulate the scope of paragraph (c)(1)(ii)(C), the
Commission is proposing to insert subordinate paragraph numbering
between the clauses in paragraph (c)(1)(ii)(C) which relate to
securities positions held in a customer account or subject to a cross-
margining agreement.
5. Quarterly Reporting--Sec. 39.19(c)(2)
Regulation 39.19(c)(2) requires a DCO to provide the financial
resources report required by Sec. 39.11(f). The Commission adopted
Sec. 39.19(c)(2) so that each DCO reporting requirement would be
included in Sec. 39.19. The Commission is proposing to revise the text
of Sec. 39.19(c)(2) to be more consistent with the text of Sec.
39.11(f); i.e., a DCO would be required to provide to the Commission
each fiscal quarter, or at any time upon Commission request, a report
of the DCO's financial resources as required by Sec. 39.11(f)(1).
6. Audited Year-End Financial Statements--Sec. 39.19(c)(3)(ii)
Regulation 39.19(c)(3)(ii) requires a DCO to file with the
Commission its audited year-end financial statements or, if there are
no financial statements available for the DCO, the consolidated audited
year-end financial statements of the DCO's parent company. As with the
quarterly filing requirements of Sec. 39.11(f)(1)(ii), the purpose of
requiring a DCO to submit year-end financial statements is to enable
the Commission to assess the financial strength of the DCO. However, if
a DCO is part of a large and complex corporate structure and files its
parent company's financial statements, it can be difficult for the
Commission to assess the financial strength of the DCO itself.
Therefore, the Commission is proposing to amend Sec. 39.19(c)(3)(ii)
to require the audited year-end financial statements of the DCO.
7. Time of Report--Sec. 39.19(c)(3)(iv)
Regulation 39.19(c)(3)(iv) requires a DCO to submit concurrently to
the Commission all reports required by paragraph (c)(3) not more than
90 days after the end of the DCO's fiscal year. The Commission may
provide an extension of time only if it determines that a DCO's failure
to submit the report in a timely manner ``could not be avoided without
unreasonable effort or expense.'' \56\ The Commission is proposing to
eliminate this requirement to provide it with the flexibility to grant
extensions under additional circumstances when appropriate.
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\56\ The Commission delegated this authority to the Director of
the Division of Clearing and Risk under Sec. 140.94(c)(9).
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Additionally, the Commission is proposing to remove the requirement
that reports be submitted concurrently in order to provide DCOs with
the flexibility to submit reports required under Sec. 39.19(c)(3) as
they are completed. The Commission recognizes that one report may be
completed sooner than the other and believes it would benefit the
Commission's oversight of the DCO if the Commission could begin
reviewing the report as soon as it is ready.
8. Decrease in Financial Resources--Sec. 39.19(c)(4)(i)
The Commission is proposing a technical amendment to Sec.
39.19(c)(4)(i), which concerns reporting of a decrease in a DCO's
financial resources. The amendment would add a reference to the
financial resources requirements of Sec. 39.33, which applies to
SIDCOs and subpart C DCOs. The Commission also is proposing to renumber
the subordinate paragraphs for the sake of clarity.
9. Decrease in Liquidity Resources--Sec. 39.19(c)(4)(ii)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(ii),\57\
which would require the same reporting for a decrease in liquidity
resources as that required by Sec. 39.19(c)(4)(i) for a decrease in
overall financial resources. The reporting required in Sec.
39.11(f)(1)(ii) provides the Commission with notice of any change in a
DCO's liquidity resources over the course of a fiscal quarter. This new
provision would provide the Commission with notice if a DCO has a
significant decrease in liquidity resources over a short period of
time, which could indicate there is a greater issue of which the
Commission should be aware.
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\57\ The Commission is proposing to renumber existing Sec.
39.19(c)(4)(ii) and all subsequent paragraphs of Sec. 39.19(c)(4).
---------------------------------------------------------------------------
10. Request to Clearing Member To Reduce Positions--Sec.
39.19(c)(4)(vi)
The Commission is proposing to amend current Sec. 39.19(c)(4)(v),
proposed to be renumbered as Sec. 39.19(c)(4)(vi), which requires a
DCO to notify the Commission immediately of a request by the DCO to one
of its clearing members to reduce the clearing member's positions, by
deleting the words ``because the [DCO] has determined that the clearing
member has exceeded its exposure limit, has failed to meet an initial
or variation margin call, or has failed to fulfill any other financial
obligation to the [DCO].'' The Commission believes it should be
[[Page 22242]]
notified of such a request regardless of the reason for the request.
11. Change in Key Personnel--Sec. 39.19(c)(4)(x)
The Commission is proposing to amend current Sec. 39.19(c)(4)(ix),
proposed to be renumbered as Sec. 39.19(c)(4)(x), which requires a DCO
to report to the Commission no later than two business days following
the departure or addition of persons who are key personnel as defined
in Sec. 39.2. The Commission proposes to clarify that the notification
requirement applies to both temporary and permanent replacements, and
that the report must include contact information.
12. Change in Legal Name--Sec. 39.19(c)(4)(xi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xi),
which would require a DCO to report a change to the legal name under
which it operates. This requirement would help to ensure that DCO-
specific information reflected on the Commission's website, as well as
in the Commission's internal records, is accurate and up-to-date. The
Commission notes, however, that the DCO's registration order (and other
existing orders issued by the Commission) would not need to be changed
to reflect the legal name change.
13. Change in Liquidity Funding Arrangement--Sec. 39.19(c)(4)(xiii)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xiii),
which would require a DCO to report a change in any liquidity funding
arrangement it has in place. This requirement would be similar to that
of Sec. 39.19(c)(4)(x) (proposed to be renumbered as Sec.
39.19(c)(4)(xii)), which requires a DCO to report any change in a
credit facility funding arrangement it has in place. This will assist
the Commission in overseeing the liquidity risk management of DCOs.
14. Change in Settlement Bank Arrangements--Sec. 39.19(c)(4)(xiv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xiv),
which would require a DCO to report a change in its arrangements with
any settlement bank used by the DCO or approved for use by the DCO's
clearing members. Receiving such reporting will aid the Commission in
monitoring a DCO's compliance with Sec. 39.14(c), which sets forth
specific requirements for settlement arrangements.
15. Settlement Bank Issues--Sec. 39.19(c)(4)(xv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xv),
which would require a DCO to report to the Commission no later than one
business day after learning of any material issues or concerns
regarding the performance, stability, liquidity, or financial resources
of any settlement bank used by the DCO or approved for use by the DCO's
clearing members.
16. Change in Depositories for Customer Funds--Sec. 39.19(c)(4)(xvi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xvi),
which would require a DCO to report any change in its arrangements with
any depositories at which the DCO holds customer funds. Receiving such
reporting will aid the Commission in monitoring a DCO's compliance with
section 4d of the CEA and related Commission regulations regarding the
treatment of customer funds, including Sec. 39.15(b).
17. Change in Fiscal Year--Sec. 39.19(c)(4)(xx)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xx),
which would require a DCO to immediately notify the Commission of any
change to the start and end dates for its fiscal year. Because several
other required reports are tied to a DCO's fiscal year (e.g., quarterly
financial reports, annual report of the chief compliance officer), a
change in the DCO's fiscal year would change the reporting periods and
deadlines for those reports, and the Commission would need to know when
those reports are to be submitted by the DCO.
18. Change in Independent Accounting Firm--Sec. 39.19(c)(4)(xxi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxi),
which would require a DCO to report to the Commission no later than one
business day after any change in the DCO's independent public
accounting firm. The report would include the date of such change, the
name and contact information of the new firm, and the reason for the
change.
19. Major Decision of the Board of Directors--Sec. 39.19(c)(4)(xxii)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxii) to
codify in Sec. 39.19 the requirement (currently in Sec.
39.32(a)(3)(i) and proposed in Sec. 39.24(a)(3)(i), as discussed
further below) that a DCO report to the Commission any major decision
of the DCO's board of directors.
20. Margin Model Issues--Sec. 39.19(c)(4)(xxiv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxiv),
which would require a DCO to report to the Commission no later than one
business day after any issue occurs with a DCO's margin model,
including margin models for cross-margined portfolios, that affects the
DCO's ability to calculate or collect initial margin or variation
margin. The Commission is proposing this change because some DCOs have
had unanticipated issues arise with the functioning of their margin
models as a result of, among other things, the introduction of new
products or significant increases in volatility.
21. Recovery and Wind-Down Plans--Sec. 39.19(c)(4)(xxv)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxv),
which would require a DCO that is required to maintain recovery and
wind-down plans pursuant to Sec. 39.39(b) to submit its plans to the
Commission no later than the date on which it is required to have the
plans. The Commission is also proposing to permit a DCO that is not
required to maintain recovery and wind-down plans pursuant to Sec.
39.39(b), but which nonetheless maintains such plans, to submit the
plans to the Commission. If a DCO subsequently revises its plans, the
DCO would be required to submit the revised plans to the Commission
along with a description of the changes and the reason for those
changes. The Commission is proposing this requirement because Sec.
39.39(b) requires certain DCOs to maintain recovery and wind-down
plans, but there is currently no explicit requirement that the DCOs
submit the plans to the Commission.
22. New Product Accepted for Clearing--Sec. 39.19(c)(4)(xxvi)
The Commission is proposing to adopt new Sec. 39.19(c)(4)(xxvi),
which would require a DCO to provide notice to the Commission no later
than 30 calendar days prior to accepting a new product for clearing.
The Commission is proposing this change because Sec. 40.2 requires a
DCM or SEF to make a submission to the Commission prior to listing a
product for trading that has not been approved under Sec. 40.3, but
there is currently no comparable requirement applicable to DCOs.
The proposed notice would include: (1) A brief description of the
new product; (2) the date on which the DCO intends to begin accepting
the new product for clearing; (3) a statement as to whether the new
product will require
[[Page 22243]]
the DCO to submit any rule changes pursuant to Sec. Sec. 40.5 or 40.6;
(4) a statement as to whether the DCO has informed, or intends to
inform, its clearing members and/or the general public of the new
product and, if written notice was given, a web address for or copy of
such notice; and (5) an explanation of any substantive opposing views
received from such outreach and how the DCO addressed such views or
objections. The Commission believes receiving the notice 30 days before
the DCO will begin accepting the product for clearing will allow
Commission staff enough time to ask further questions of the DCO as
necessary.
The Commission has not defined ``product'' for purposes of Sec.
40.2 or Sec. 40.3. The Commission requests comment on whether defining
this term would be helpful in clarifying what products must be reported
to the Commission under proposed new Sec. 39.19(c)(4)(xxvi). If so,
the Commission further requests comment regarding how the term should
be defined.
23. Requested Reporting--Sec. 39.19(c)(5)
Regulation 39.19(c)(5)(i) through (iii) requires a DCO to provide
to the Commission, upon request by the Commission, specific types of
information. Paragraphs (c)(5)(i) through (iii) states that the
information must be provided to the Commission ``in the format and
manner specified, and within the time provided, by the Commission in
the request.'' The Commission is proposing to amend Sec.
39.19(c)(5)(i) through (iii) by deleting this language from each of the
subparagraphs and adding introductory language to the paragraph that
would require a DCO to provide the information specified in the
paragraphs upon request by the Commission ``and within the time
specified in the request.'' Regulation 39.19(b) already requires a DCO
to provide the information in the format and manner specified by the
Commission, so it is unnecessary to repeat that requirement in Sec.
39.19(c)(5).
The Commission is proposing to remove current Sec.
39.19(c)(5)(iii), which requires a DCO to report to the Commission upon
request end of day gross positions by each beneficial owner. This
provision is no longer necessary given the proposed amendment to Sec.
39.19(c)(1)(i), which requires a DCO to report margin, cash flow, and
position information by individual customer account.
I. Public Information--Sec. 39.21
Regulation 39.21 implements Core Principle L, which generally
requires that a DCO provide to market participants sufficient
information to enable the market participants to identify and evaluate
accurately the risks and costs associated with using the services of
the DCO. The Commission is proposing some minor changes to clarify the
requirements of Sec. 39.21.
1. Public Disclosure and Publication of Information--Sec. 39.21(c) and
(d)
Regulation 39.21(c) requires a DCO to disclose publicly and to the
Commission information concerning: (1) The terms and conditions of each
contract, agreement, and transaction cleared and settled by the DCO;
(2) each clearing and other fee that the DCO charges its clearing
members; (3) the margin-setting methodology; (4) the size and
composition of the financial resource package available in the event of
a clearing member default; (5) daily settlement prices, volume, and
open interest for each contract, agreement, or transaction cleared or
settled by the DCO; (6) the DCO's rules and procedures for defaults in
accordance with Sec. 39.16; and (7) any other matter that is relevant
to participation in the clearing and settlement activities of the DCO.
Regulation 39.21(d) requires the DCO to post all of this information,
as well as the DCO's rulebook and a list of its current clearing
members, on the DCO's website, unless otherwise permitted by the
Commission.
The Commission is proposing to remove Sec. 39.21(d) and
incorporate its requirements into Sec. 39.21(c). The Commission
believes that this will help clarify for DCOs what information must be
made publicly available on their websites. The Commission has noted
that some DCOs have made available certain items of information listed
in current Sec. 39.21(c) only by posting their rulebooks on their
websites. The Commission wishes to clarify that a DCO must make each of
the items of information listed in proposed Sec. 39.21(c) available
separately on the DCO's website and not just in the DCO's rulebook.
This will assist members of the public in locating the relevant
information and may facilitate greater uniformity across DCO websites.
2. Financial Resources--Sec. 39.21(c)(4)
Regulation 39.21(c)(4) requires a DCO to disclose publicly the size
and composition of its financial resource package available in the
event of a clearing member default. The Commission has received
questions concerning how often this information must be updated.
Regulation 39.11(f)(1)(i)(A) requires a DCO to report this information
to the Commission each fiscal quarter or at any time upon Commission
request. The Commission believes it is reasonable to expect a DCO to
update this information publicly with the same frequency. Therefore,
the Commission is proposing to amend Sec. 39.21(c)(4) by adding the
words ``updated as of the end of the most recent fiscal quarter or upon
Commission request and posted concurrently with submission of the
report to the Commission under Sec. 39.11(f)(1)(i)(A).''
3. Daily Settlement Prices, Volume, and Open Interest--Sec.
39.21(c)(5)
Regulation 39.21(c)(5) requires a DCO to disclose publicly daily
settlement prices, volume, and open interest for each contract,
agreement, or transaction cleared or settled by the DCO. Pursuant to
current Sec. 39.21(d), this information must be made available to the
public on the DCO's website no later than the business day following
the day to which the information pertains.
The Commission has received questions from DCOs about the
appropriate scope and time period for disclosure of daily settlement
prices. With respect to scope, Sec. 39.21(c)(5) clearly refers to
daily settlement prices, volume, and open interest ``for each contract,
agreement, or transaction cleared or settled'' by the DCO. The
Commission therefore expects comprehensive disclosure of daily
settlement prices, volume, and open interest for all contracts cleared
or settled by the DCO, acting in its capacity as a DCO.\58\ However,
the Commission is aware that certain DCOs may not be posting all of the
required information on their websites. The Commission notes that
current Sec. 39.21(d) requires posting of this information ``unless
otherwise permitted by the Commission.'' Accordingly, any DCO that does
not post all of the required information must seek relief from the
Commission. In addition, although the plain language of Sec.
39.21(c)(5) indicates that ``daily'' is intended to apply not only to
settlement prices, but also to volume and open interest, the Commission
hereby confirms that DCOs are expected to publicly disclose
[[Page 22244]]
volume and open interest, as well as settlement prices, on a daily
basis in order to comply with Sec. 39.21(c)(5).
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\58\ Regulation 39.21(c)(5) does not require a DCO to post
information concerning contracts, agreements, or transactions it
clears outside of its capacity as a DCO. For example, a DCO that is
also registered with the SEC as a securities clearing agency would
not have to post information concerning security-based swaps in
order to comply with this provision.
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Regulation 39.21(c)(5) does not specify a period of time the
information must remain on the website. However, the Commission notes
that certain DCOs make several days' worth of information available on
their websites, and the Commission encourages others to do the same.
4. Swaps Required To Be Cleared--Sec. 39.21(c)(8)
Regulation 50.3(a) requires that a DCO make publicly available on
its website a list of all swaps that it will accept for clearing and
identify which swaps on the list are required to be cleared under
section 2(h)(1) of the CEA and part 50 of the Commission's regulations.
The Commission is proposing to adopt Sec. 39.21(c)(8) to add a cross-
reference to Sec. 50.3(a).
J. Governance Fitness Standards, Conflicts of Interest, and Composition
of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
The Dodd-Frank Act added three new core principles to the CEA
relating to the governance of a DCO and the mitigation of potential
conflicts of interest within a DCO. Core Principle O requires a DCO to
establish governance arrangements that are transparent to fulfill
public interest requirements and to permit the consideration of the
views of owners and participants. Core Principle O also requires a DCO
to establish and enforce appropriate fitness standards for directors,
members of any disciplinary committee, members of the DCO, any other
individual or entity with direct access to the settlement or clearing
activities of the DCO, and any other party affiliated with any of the
foregoing individuals or entities.
Core Principle P requires a DCO to establish and enforce rules to
minimize conflicts of interest in the decision-making process of the
DCO and establish a process for resolving such conflicts of interest.
Core Principle Q requires a DCO to ensure that the composition of its
governing board or committee includes market participants.
After the Dodd-Frank Act was enacted, the Commission proposed
regulations that would have implemented Core Principles O, P, and
Q.\59\ Those regulations have not been finalized, but the Commission
did adopt other regulations that address some of the same issues that
the proposed regulations would have addressed. For example, Sec.
39.12(a)(1) requires a DCO to have participant eligibility criteria
that permit fair and open access to the DCO; this addresses the concern
that a DCO's existing clearing members might try to block potential
members' access to the DCO for reasons that are not risk-based.\60\
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\59\ See Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR 63732 (Oct. 18,
2010); Governance Requirements for Derivatives Clearing
Organizations, Designated Contract Markets, and Swap Execution
Facilities; Additional Requirements Regarding the Mitigation of
Conflicts of Interest, 76 FR 722 (Jan. 6, 2011). The Commission is
withdrawing these proposals as they relate to DCOs.
\60\ Requirements for Derivatives Clearing Organizations,
Designated Contract Markets, and Swap Execution Facilities Regarding
the Mitigation of Conflicts of Interest, 75 FR at 63735-36.
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As previously noted, the Commission also adopted subpart C of part
39 of the Commission's regulations.\61\ Included in subpart C is Sec.
39.32, which sets forth the requirements for governance arrangements
for SIDCOs and subpart C DCOs. In promulgating Sec. 39.32, the
Commission noted that its requirements are consistent with Core
Principles O, P, and Q.\62\
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\61\ See Derivatives Clearing Organizations and International
Standards, 78 FR 72476 (Dec. 2, 2013).
\62\ See id. at 72485-86.
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The Commission is proposing to remove Sec. 39.32 and adopt new
Sec. Sec. 39.24, 39.25, and 39.26, which would incorporate all of the
requirements of Sec. 39.32 and move them to subpart B, making them
applicable to all DCOs, not just SIDCOs and subpart C DCOs. These
governance requirements are designed to enhance risk management and
controls by promoting transparency of governance arrangements and
making sure that the interests of a DCO's clearing members and, where
relevant, their customers are taken into account. The Commission
believes these standards are appropriate for all DCOs, as most DCOs
already meet such standards in order to be considered a QCCP, and
incorporate best practices within the clearing industry. The Commission
notes, however, that while the language that is proposed to be adopted
in these sections is essentially the same as that which is included in
Sec. 39.32, the provisions have been rearranged to correspond with the
relevant core principle--Sec. 39.24 implements Core Principle O; Sec.
39.25 implements Core Principle P; and Sec. 39.26 implements Core
Principle Q.
As noted above, Core Principle Q requires a DCO to ensure that the
composition of its governing board or committee includes market
participants. The Commission has become aware of issues in interpreting
this requirement. In order to avoid ambiguity and provide greater
clarity, the Commission is proposing to clarify certain aspects of this
requirement. First, Commission staff has received questions as to
whether the term ``governing'' should be read to apply only to the term
``board,'' or if it should be read to apply to the term ``committee''
as well. Consistent with the title of Core Principle Q, ``Composition
of Governing Boards,'' the Commission interprets this clause to refer
to the governing body, whether a ``board'' or a ``committee,'' and does
not interpret this clause to refer to the ``governing board'' or a
``committee,'' which could be any type of committee. Therefore, the
Commission is proposing to require market participation on the DCO's
governing board or board-level committee, i.e., the group with the
ultimate decision-making authority.
Second, the Commission is proposing to define ``market
participant'' in part 39 to mean any clearing member of the DCO or
customer of such clearing member, or an employee, officer, or director
of such an entity. A DCO's clearing members and their customers have a
unique perspective that complements that of the other decision makers
on the governing board. Customers clearing trades through an FCM in a
particular market are exposed to the risks of that market, just as
clearing members are, and therefore have similar interests in the
decisions that govern the operations of the DCO. In general, clearing
members and their customers understand risk, have market experience and
perspective, and have knowledge of clearing and the markets for which
the DCO clears. The Commission notes that an employee, officer, or
director of a market participant serving on a DCO's governing board or
committee is not necessarily required to have voting power, as such
participation may impose duties that are in conflict with the employee,
officer, or director's duties to the market participant. However, a
non-voting market participant must otherwise be enabled by the DCO to
participate fully in board meetings in terms of receiving information,
providing input, and representing market participant views.
K. Legal Risk--Sec. 39.27
Regulation 39.27(c) requires a DCO that provides clearing services
outside the United States to identify and address conflict of law
issues, specify a choice of law, be able to demonstrate the
enforceability of its choice of law in relevant jurisdictions, and be
able to demonstrate that its rules, procedures, and contracts are
enforceable in all
[[Page 22245]]
relevant jurisdictions. In addition, Form DCO requires each applicant
for DCO registration that provides or will provide clearing services
outside the United States to provide a memorandum to the Commission
that would, among other things, analyze the insolvency issues in the
jurisdiction where the applicant is based.
The Commission is proposing to amend Sec. 39.27(c) by adding
paragraph (c)(3). Proposed Sec. 39.27(c)(3) would require a DCO that
provides clearing services outside the United States to ensure on an
ongoing basis that the memorandum required in Exhibit R of Form DCO is
accurate and up to date and to submit an updated memorandum to the
Commission promptly following all material changes to the analysis or
content contained in the memorandum.
L. Fully-Collateralized Positions
The Commission has oversight of a few registered DCOs that clear
fully-collateralized positions. Fully-collateralized positions are
designed to have on deposit a sufficient amount of funds, at all times,
to cover the maximum potential loss that could be incurred in
connection with a position. In the case of binary options, for example,
the maximum risk is limited to the amount invested in the option.
Because counterparties do not take a position in the underlying asset,
movements in the underlying asset would not affect the payout received
or loss incurred. Full collateralization prevents a DCO from being
exposed to credit risk stemming from the inability of a clearing member
or customer of a clearing member to meet a margin call or a call for
additional capital. This limited exposure and full collateralization of
that exposure renders certain provisions of part 39 inapplicable or
unnecessary. As a result, the Division has granted relief from certain
provisions of part 39 to DCOs that clear fully-collateralized
positions.\63\ With this release, the Commission is proposing to codify
this relief and to provide clarity to DCOs and future applicants for
DCO registration regarding how the regulations in part 39 apply to DCOs
that clear fully-collateralized positions.\64\
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\63\ See CFTC Letter No. 14-04 (January 16, 2014) (granting
exemptive relief to the North American Derivatives Exchange, Inc.
(Nadex)); CFTC Letter No. 17-35 (July 24, 2017) (granting exemptive
relief to LedgerX).
\64\ The Division also issued interpretive guidance to Nadex for
other provisions in part 39. CFTC Letter No. 14-05 (January 16,
2014). The interpretive guidance may be relied on by third parties,
and is not impacted by this proposed rulemaking.
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Fully-collateralized positions do not expose DCOs to many of the
risks that traditionally margined products do. Therefore, the
Commission is proposing to amend certain part 39 regulations to better
accommodate fully-collateralized positions, where full-
collateralization addresses the risks that the regulations are meant to
address.
The proposed amendments are based on an assessment of how the DCO
Core Principles and part 39 apply to fully-collateralized positions, as
well as the relief previously granted to DCOs that clear such
positions. The Commission believes the proposed amendments would not
negatively impact prudent risk management at any DCO, regardless of the
types of products cleared.
1. Definition of ``Fully-Collateralized Positions''--Sec. 39.2
The Commission is proposing to define a ``fully-collateralized
position'' as a contract cleared by a derivatives clearing organization
that requires the derivatives clearing organization to hold, at all
times, funds in the form of the required payment sufficient to cover
the maximum possible loss that a counterparty could incur upon
liquidation or expiration of the contract.
2. Computation of Financial Resources Requirement--Sec. 39.11(c)(1)
Regulation 39.11(a)(1) requires a DCO to maintain financial
resources sufficient to meet its financial obligations to its clearing
members notwithstanding a default by the clearing member creating the
largest financial exposure for the DCO in extreme but plausible market
conditions. Regulation 39.11(c)(1) \65\ requires a DCO to perform
monthly stress testing in order to make a reasonable calculation of the
financial resources it would need in the event of such a default.
Division staff has expressed the view that a DCO can satisfy the
requirements of Sec. 39.11(a)(1) by clearing fully-collateralized
positions.\66\ For fully-collateralized positions, a DCO holds its
maximum possible loss on each contract at all times and does not face
the risk of a clearing member default. The monthly stress tests
required by Sec. 39.11(c)(1)(i) are therefore unnecessary for fully-
collateralized positions. Accordingly, the Commission is proposing to
amend Sec. 39.11(c)(1)(i) to clarify that a DCO does not have to
perform monthly stress tests on fully-collateralized positions.
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\65\ Revisions contained elsewhere in this proposed rulemaking
would renumber this paragraph as Sec. 39.11(c)(1)(i).
\66\ See CFTC Letter No. 14-05 (January 16, 2014) (providing
interpretive guidance to Nadex).
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3. Liquidity of Financial Resources--Sec. 39.11(e)(1)(ii)
Regulation 39.11(e)(1)(ii) requires a DCO to have enough financial
resources to meet the requirements of Sec. 39.11(a)(1) that are
sufficiently liquid to enable the DCO to fulfill its obligations during
a one-day settlement cycle. The specific amount of liquid resources a
DCO must hold is based on the historical settlement pays of its
clearing members. A DCO maintains sufficient liquidity for fully-
collateralized positions by requiring clearing members to post the full
potential loss of a position in the form of the potential obligation.
Requiring collateral to be in the form of the potential obligation
eliminates the risk that the DCO will not have sufficient liquidity to
meet its obligations and the need for daily mark-to-market settlements.
Further, if a DCO were to complete the calculation required by Sec.
39.11(e)(1)(ii), the amount would not change from day to day as the DCO
operates a fully-collateralized model. As a result, the calculation
required in Sec. 39.11(e)(1)(ii) is neither necessary or applicable
for fully-collateralized positions. The Commission is therefore
proposing to amend Sec. 39.11(e)(1)(iv) to clarify that DCOs do not
need to include fully-collateralized positions in the calculation
required thereunder.
4. Periodic Reporting of Participant Eligibility--Sec. 39.12(a)(5)(i)
and (a)(5)(i)(B)
Regulation 39.12(a)(5)(i) requires a DCO to require its clearing
members to provide the DCO with periodic financial reports that allow
the DCO to assess whether participation requirements are being met on
an ongoing basis. Regulation 39.12(a)(5)(i)(B) \67\ requires a DCO to
make these reports available to the Commission at the Commission's
request.\68\ The Commission's participant eligibility requirements in
Sec. 39.12(a) are intended to ensure that DCO participants maintain
sufficient financial resources and operational capacity to meet the
obligations arising from clearing at a DCO.\69\ Clearing members that
only clear fully-collateralized positions present no
[[Page 22246]]
credit or default risk to the DCO because their full potential loss is
already held by the DCO. Thus, periodic financial reports from non-FCM
clearing members that only clear fully-collateralized positions do not
provide any risk management benefit to DCOs. The Commission therefore
is proposing to add new Sec. 39.12(a)(5)(v) to exclude non-FCM
clearing members that only clear fully-collateralized positions from
the financial reporting requirements in Sec. 39.12(a)(5)(i) and
(a)(5)(i)(B).
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\67\ Revisions contained elsewhere in this proposed rulemaking
would renumber Sec. 39.12(a)(5)(i)(B) as Sec. 39.12(a)(5)(iii).
\68\ Regulation 39.12(a)(5)(i)(B) allows DCOs to either require
clearing members to make the reports available to the Commission or
to provide the reports to the Commission directly.
\69\ See Derivatives Clearing Organization General Provisions
and Core Principles, 76 FR at 69352.
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5. Large Trader Stress Tests--Sec. 39.13(h)(3)
Regulation 39.13(h)(3) requires a DCO to conduct stress testing on
a daily basis with respect to each large trader who poses significant
risk to a clearing member or the DCO, and at least on a weekly basis
with respect to each clearing member account, by house origin and by
each customer origin. As discussed above, DCOs hold, at all times, the
full potential loss of fully-collateralized positions cleared by the
DCO, and a DCO does not face the risk of default from accounts that
only hold fully-collateralized positions. As a result, such stress
tests would not provide DCOs new information on accounts that only
clear fully-collateralized positions. The Commission is therefore
proposing to add new Sec. 39.13(h)(3)(iii) to exclude clearing member
accounts that hold only fully-collateralized positions from the stress
testing requirements in Sec. 39.13(h)(3)(i) and (ii).
6. Daily Reporting--Sec. 39.19(c)(1)(i)
Regulation 39.19(c)(1)(i) requires a DCO to submit to the
Commission a daily report containing information on initial margin,
daily variation margin payments, other daily cash flows, and end-of-day
positions. Because fully-collateralized positions do not pose a credit
risk to the DCO or other participants, the Commission does not need
daily reporting of this information with respect to fully-
collateralized positions. Therefore, the Commission is proposing to
amend Sec. 39.19(c)(1)(i) such that the enumerated daily reporting is
not required with respect to fully-collateralized positions.
V. Amendments to Part 39--Subpart C--Provisions Applicable to SIDCOs
and DCOs That Elect To Be Subject to the Provisions
A. Financial Resources for SIDCOs and Subpart C DCOs--Sec. 39.33
Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is
systemically important in multiple jurisdictions, or that is involved
in activities with a more complex risk profile, to maintain financial
resources sufficient to enable it to meet its financial obligations to
its clearing members notwithstanding a default by the two clearing
members creating the largest combined loss in extreme but plausible
market conditions. The Commission is proposing to amend Sec.
39.33(a)(1) by replacing the phrase ``largest combined loss'' with
``largest combined financial exposure'' in order to achieve consistency
with the relevant provisions of Commission regulations and the CEA--
specifically, Sec. 39.11(a)(1) and section 5b(c)(2)(B) of the CEA
regarding DCO financial resources requirements.
Regulation 39.33(c)(1) requires a SIDCO or subpart C DCO to
maintain eligible liquid resources sufficient to meet its obligations
to perform settlements with a high degree of confidence under a wide
range of stress scenarios that should include the default of the
clearing member creating the largest aggregate liquidity obligation for
the SIDCO or subpart C DCO. The Commission is proposing to amend Sec.
39.33(c)(1) by adding the phrase ``in all relevant currencies'' to
clarify that the ``largest aggregate liquidity obligation'' means the
total amount of cash, in each relevant currency, that the defaulted
clearing member would be required to pay to the DCO during the time it
would take to liquidate or auction the defaulted clearing member's
positions, as reasonably modeled by the DCO. When evaluating its
largest aggregate liquidity obligation on a day-to-day basis over a
multi-day period, a SIDCO or subpart C DCO may use its liquidity risk
management model.
Regulation 39.33(d) requires a SIDCO or a subpart C DCO to
undertake due diligence to confirm that each of its liquidity providers
has the capacity to perform its commitments to provide liquidity, and
to regularly test its own procedures for accessing its liquidity
resources. The Commission is proposing to additionally require a SIDCO
with access to deposit accounts and related services at a Federal
Reserve Bank to use such services where practical. This requirement
would further enhance a SIDCO's financial integrity and management of
liquidity risk.\70\
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\70\ Under section 806(a) of the Dodd-Frank Act, 12 U.S.C.
5465(a), the Board of Governors of the Federal Reserve System may
authorize a Federal Reserve Bank to establish and maintain an
account for a financial market utility (FMU), which includes a
SIDCO. A SIDCO with access to accounts and services at a Federal
Reserve Bank is required to comply with related rules published by
the Board of Governors of the Federal Reserve System. See generally
Financial Market Utilities, 78 FR 76973 (Dec. 20, 2013) (final rules
adopted by the Board of Governors to govern accounts held by
designated FMUs).
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B. Risk Management for SIDCOs and Subpart C DCOs--Sec. 39.36
Regulation 39.36 requires a SIDCO or a subpart C DCO to conduct
stress tests of its financial and liquidity resources and to regularly
conduct sensitivity analyses of its margin models. The Commission is
proposing to amend Sec. 39.36(a)(6) to clarify that a SIDCO or subpart
C DCO that is subject to the minimum financial resources requirement
set forth in Sec. 39.11(a)(1), rather than Sec. 39.33(a), should use
the results of its stress tests to support compliance with that
requirement.
The Commission is also proposing to amend Sec. 39.36(b)(2)(ii) to
replace the words ``produce accurate results'' with ``react
appropriately'' to more accurately reflect that the purpose of a
sensitivity analysis is to assess whether the margin model will react
appropriately to changes of inputs, parameters, and assumptions. The
Commission is also proposing to amend Sec. 39.36(d), which requires
each SIDCO and subpart C DCO to ``regularly'' conduct an assessment of
the theoretical and empirical properties of its margin model for all
products it clears, to clarify that the assessment should be conducted
``on at least an annual basis (or more frequently if there are material
relevant market developments).''
The Commission is also proposing to amend Sec. 39.36(e) by adding
the heading ``[i]ndependent validation'' to the provision.
C. Additional Disclosure for SIDCOs and Subpart C DCOs--Sec. 39.37
Regulation 39.37(a) and (b) requires a SIDCO or a subpart C DCO to
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework
\71\ and, in order to ensure the continued accuracy and usefulness of
its responses, to review and update them at least every two years and
following material changes to the SIDCO's or subpart C DCO's system or
environment in which it operates. The Commission is proposing to amend
Sec. 39.37(b) to additionally require that a SIDCO or a subpart C DCO
provide notice to the Commission of any such updates to its responses
following material changes to its system or environment no later than
ten business days after the updates are made. Further, such notice
would have
[[Page 22247]]
to be accompanied by a copy of the text of the responses, specifying
the changes that were made to the latest version of the responses.
Providing this notice would ensure that the Commission has access to
the most current information available and would enable the Commission
to identify changes since the last update to the disclosure responses.
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\71\ See CMPI-IOSCO, Principles for Financial Market
Infrastructures: Disclosure Framework and Assessment Methodology
(Dec. 2012), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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Regulation 39.37(c) requires a SIDCO or a subpart C DCO to
disclose, to the public and to the Commission, relevant basic data on
transaction volume and values. In adopting this provision, the
Commission noted that this requirement was intended to be consistent
with the then-forthcoming quantitative disclosure standards being
developed by CPMI-IOSCO.\72\ On February 26, 2015, CPMI-IOSCO published
the Public Quantitative Disclosure Standards for Central
Counterparties.\73\ The Commission is proposing to amend Sec. 39.37(c)
to explicitly state that a SIDCO or a subpart C DCO must disclose
relevant basic data on transaction volume and values that are
consistent with the standards set forth in the CPMI-IOSCO Public
Quantitative Disclosure Standards for Central Counterparties.
---------------------------------------------------------------------------
\72\ Derivatives Clearing Organizations and International
Standards, 78 FR at 72493.
\73\ See CPMI-IOSCO, Public Quantitative Disclosure Standards
for Central Counterparties (Feb. 2015), available at https://www.bis.org/cpmi/publ/d125.pdf.
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D. Corrections to Subpart C Regulations
The Commission is proposing to amend Sec. 39.39(a)(2) to change
the word ``or'' to ``of.''
VI. Amendments to Appendix A to Part 39--Form DCO
To request registration as a DCO, Sec. 39.3(a)(2) requires an
applicant to file a complete Form DCO, which includes a cover sheet,
all applicable exhibits, and any supplemental materials, as provided in
appendix A to part 39. The Commission uses Form DCO, which is comprised
of a series of different exhibits that require the applicant to provide
details of its operations, to determine whether the applicant
demonstrates compliance with the Act and applicable Commission
regulations. Applicants must also use Form DCO to amend a pending
application or request an amended order of registration.
The Commission is proposing to amend Form DCO to better describe
the required exhibits in a manner that is consistent with the proposed
amendments to the relevant regulations as described herein. For
example, the Commission proposes to amend Exhibit A-11 to incorporate
the more flexible CCO reporting structure that the Commission is
proposing in Sec. 39.10(c)(1)(ii); add proposed Exhibit A-12 to
describe a DCO's enterprise risk management program as consistent with
newly proposed Sec. 39.10(d); amend Exhibit B-1 to incorporate
proposed amendments to the Commission's financial resources
requirements in proposed Sec. 39.11; and amend Exhibits O, P and Q to
reflect the Commission's proposed amendments to Sec. Sec. 39.24,
39.25, and 39.26 which would incorporate the specific governance
arrangement, conflict of interest, and board composition requirement,
which are currently only detailed in Sec. 39.32 for SIDCOs and subpart
C DCOs.
The Commission is also proposing to amend Form DCO to update the
form to reflect the Commission's other rulemaking efforts. For example,
the Commission proposes to amend Exhibit A-6 to update the reference
from public director to independent director to remove terminology that
was proposed but not ultimately adopted by the Commission for certain
governance requirements, and amend Exhibit F-2 to include cross-
references to Commission regulations in part 22 which was adopted after
the Commission adopted part 39.
The Commission also proposes to amend Form DCO to eliminate
information that has proven to be unnecessary to determine an
applicant's compliance with the Act and applicable Commission
regulations. For example, the Commission proposes to eliminate the
requirement within Exhibit A-6 that an applicant provide contact
information for each officer, director, governor, general partners, LLC
managers, and all standing committee members. Lastly, the Commission
also proposes to remove references within the Form DCO instructions to
use the form to request an amended order of registration. The
Commission intends for these proposed Form DCO changes to establish a
clearer application process for applicants that also provides the
Commission with improved information to determine compliance with the
Act and Commission regulations.
VII. Amendments to Appendix B to Part 39--Subpart C Election Form
The Commission is proposing to amend the subpart C Election Form to
better reflect the requirements in subpart C of part 39 and to more
closely align the format of the subpart C Election Form with Form DCO
by specifying the information and/or documentation that must be
provided by a DCO as part of its petition for subpart C election.
Currently, unlike Form DCO, the subpart C Election Form references
the corresponding regulations in subpart C, but does not specify the
type or level of information that must be filed as an exhibit. In order
to more closely align the format of the subpart C Election Form with
Form DCO, the Commission is proposing to amend the subpart C Election
Form to reflect the requirements of subpart C.
VIII. Amendments to Part 140--Organization, Functions, and Procedures
of the Commission
Regulation 140.94 includes delegation of authority from the
Commission to the Director of the Division of Clearing and Risk. The
Commission is proposing to revise Sec. 140.94 to conform to the
changes to part 39 it is proposing in this release.
IX. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) requires that agencies
consider whether the regulations they propose will have a significant
economic impact on a substantial number of small entities and, if so,
provide a regulatory flexibility analysis on the impact.\74\ The
regulations proposed by the Commission will affect only DCOs. The
Commission has previously established certain definitions of ``small
entities'' to be used by the Commission in evaluating the impact of its
regulations on small entities in accordance with the RFA.\75\ The
Commission has previously determined that DCOs are not small entities
for the purpose of the RFA.\76\ Accordingly, the Chairman, on behalf of
the Commission, hereby certifies pursuant to 5 U.S.C. 605(b) that the
proposed regulations will not have a significant economic impact on a
substantial number of small entities.
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\74\ 5 U.S.C. 601 et seq.
\75\ 47 FR 18618 (Apr. 30, 1982).
\76\ See 66 FR 45604, 45609 (Aug. 29, 2001).
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B. Paperwork Reduction Act
The Paperwork Reduction Act (PRA) \77\ provides that Federal
agencies, including the Commission, may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a valid control number from the Office of Management
and Budget (OMB). This proposed rulemaking contains reporting and
recordkeeping requirements that are collections of information within
the meaning of the PRA. If adopted,
[[Page 22248]]
responses to the collections of information would be required to obtain
a benefit. This section addresses the impact that the proposal will
have on existing information collection requirements associated with
part 39.
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\77\ 44 U.S.C. 3501 et seq.
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Additionally, the Commission is consolidating four collections of
information relating to requirements under part 39.\78\ The
requirements covered by all four existing collections will be combined
in OMB control number 3038-0076, which will be renamed as
``Requirements for Derivatives Clearing Organizations,'' and OMB
control numbers 3038-0066, 3038-0069, and 3038-0081 will be cancelled.
Changes to the existing information collection requirements as a result
of this proposal are set forth below.
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\78\ The four collections are: OMB Control No. 3038-0066,
Financial Resources Requirements for Derivatives Clearing
Organizations; OMB Control No. 3038-0081, General Regulations and
Derivatives Clearing Organizations; OMB Control No. 3038-0069,
Information Management Requirements for Derivatives Clearing
Organizations; and OMB Control No. 3038-0076, Risk Management
Requirements for Derivatives Clearing Organizations.
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1. Subpart A--General Requirements Applicable to DCOs
Subpart A establishes the procedures and information required for
applications for registration as a DCO, including submission of a
completed Form DCO accompanied by all applicable exhibits. Form DCO is
covered by OMB control number 3038-0076. Currently, collection 3038-
0076 reflects that there are 3 applicants for DCO registration annually
and that it takes 400 hours to complete and submit the form, including
all exhibits. The Commission is reducing the number of potential
applicants for DCO registration to two annually, based on recent
numbers of applications filed. The Commission is proposing to modify
and update Form DCO to conform it to the proposed revisions to part 39.
Additionally, the Commission is proposing to apply certain
governance requirements applicable to SIDCOs and subpart C DCOs to all
DCOs. This necessitates moving the corresponding burden hours from the
subpart C Election Form to Form DCO. Specifically, 22 burden hours per
respondent for the subpart C Election Form--Exhibits A through G,
currently under OMB control number 3038-0081, would transfer to the
Form DCO burden per respondent in OMB control number 3038-0076.
The proposal would eliminate the requirement for DCOs to use Form
DCO to request an amended order of DCO registration. The Commission
estimates the burden hours per respondent would decrease by one hour
due to the proposed change to Sec. 39.3(a)(2) that would no longer
require a DCO seeking to amend its order of registration to submit Form
DCO. The new aggregate proposed estimate for Form DCO is as follows:
Form DCO--Sec. 39.3(a)(2)
Estimated number of respondents: 2.
Estimated number of reports per respondent: 1.
Average number of hours per report: 421.
Estimated gross annual reporting burden: 842.
The Commission also is proposing to amend certain existing
provisions of Sec. 39.3 regarding requests for extension of the review
of a DCO application, vacation of a DCO's registration, and transfer of
positions. The Commission is proposing to adopt new Sec. 39.3(a)(6),
which would permit the Commission to extend the 180-day review period
for DCO applications specified in Sec. 39.3(a)(1) for any period of
time to which the applicant agrees in writing. Although this is not a
new practice, it was not previously accounted for separately in this
information collection. The Commission is estimating that there would
be two requests for extension of the DCO application per year, one per
respondent, and that it will take one hour per report. The new
aggregate proposed estimate for the agreement in writing to extend the
application review period pursuant to Sec. 39.3(a)(6) is as follows:
Estimated number of respondents: 2.
Estimated number of reports per respondent: 1.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 2.
The Commission is proposing to amend Sec. 39.3(e) to codify
statutory requirements regarding vacation of registration. The proposed
changes would specify information that a DCO must include in its
request to vacate, and require a DCO to continue to maintain its books
and records after its registration has been vacated for the requisite
statutory and regulatory retention periods. The Commission estimates
that there would be one request to vacate every three years and that it
would take three hours per report. The annual aggregate burden for the
request to vacate requirement has been divided to reflect the estimate
of one request to vacate a DCO registration pursuant to Sec.
39.3(e)(1) every three years as follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.33.
Average number of hours per report: 1.
Estimated gross annual reporting burden: 1.
For recordkeeping by a DCO that has requested to vacate its
registration, the Commission is adding this recordkeeping burden to OMB
control number 3038-0076, which currently includes 16 responses and 50
burden hours for the recordkeeping requirement of registered DCOs. The
Commission is also transferring the 100 recordkeeping burden hours
currently contained in OMB control number 3038-0069 to OMB control
number 3038-0076. The burden for the request to vacate requirement has
been divided to reflect the estimate of one record of the request to
vacate a DCO registration pursuant to Sec. 39.3(e)(1) every three
years. The combined annual aggregate recordkeeping burden estimate for
subparts A and B of part 39 under OMB control number 3038-0076 is as
follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 150.
Estimated number of respondents-request to vacate: 1.
Estimated number of reports per respondent-request to vacate: 0.33.
Average number of hours per report-request to vacate: 1.
Estimated gross annual recordkeeping burden: 2,401.\79\
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\79\ The total annual recordkeeping burden estimate reflects the
combined figures for 16 registered DCOs with an annual burden of one
response and 150 hours per response (16 x 1 x 150 = 2,400), and one
vacated DCO registration every three years with an annual burden of
one hour.
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The Commission is proposing changes to Sec. 39.3(f), to be
renumbered as Sec. 39.3(g), to simplify the requirements for
requesting a transfer of open interest. The rule submission filing is
covered by OMB control number 3038-0093, which reflects that there are
50 reports annually and that it takes two hours per response. The
Commission is of the view that to the extent that the transfer of open
interest request would be submitted as part of a new rule or rule
amendment filing pursuant to Sec. 40.5, the proposed change is already
covered by OMB control number 3038-0093 and there is no change in the
burden estimates.
[[Page 22249]]
2. Subpart B--Requirements for Compliance With Core Principles
a. CCO Annual Reporting Requirements--Sec. 39.10(c)
Currently, Sec. 39.10(c)(3) requires the CCO of a DCO to prepare,
and to submit to the Commission and the DCO's board of directors, an
annual compliance report containing specified information regarding the
DCO's compliance with the core principles and Commission regulations.
The burden for CCO annual reports, which is currently covered by OMB
control number 3038-0081, is being moved to OMB control number 3038-
0076. OMB control number 3038-0081 reflects that there are 12
respondents that submit CCO annual reports annually and that it takes
80 hours to complete and submit the report, and 960 hours in the
aggregate. The number of respondents is being updated to 16 to reflect
the current number of registered DCOs. The Commission is proposing to
allow a DCO to incorporate by reference certain sections of prior
annual compliance reports. Specifically, if the sections of the CCO
annual report that describe the DCO's compliance policies and
procedures have not materially changed, the current report may
reference a prior year's report, provided that the referenced report
was filed within the prior five years. The Commission estimates that
this change should decrease the burden of preparing the CCO annual
report by ten hours per respondent, and 160 hours in aggregate, by not
requiring the report to repeat potentially lengthy descriptions of
policies and procedures that have already been adequately described in
a CCO annual report previously submitted to the Commission.
The Commission is proposing to specify that the CCO annual report
must identify, by name, rule number, or other identifier, the policies
and procedures intended to comply with each core principle and
applicable regulation. The Commission estimates the proposed change
would add two hours to the burden of preparing each report, and 32
hours in the aggregate. Lastly, the Commission is proposing to amend
Sec. 39.10(c)(4) to require that the CCO annual report describe the
process by which the report is submitted to the DCO's board or senior
officer. This requirement would require DCOs to memorialize in the
report a process they are already required to follow. Nonetheless, the
Commission anticipates an increase of one hour in the burden for each
report, and 16 hours in the aggregate due to this proposed change.
Overall, the Commission estimates that the net impact of these
increases and reductions to the CCO annual report burden due to the
proposed changes is expected to be a decrease of seven hours per
respondent in the existing information collection burden associated
with the CCO annual report.\80\ The aggregate proposed estimate for the
CCO annual report is as follows:
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\80\ The existing burden estimate for the CCO annual report is
80 hours per response. For the new estimate, the Commission is
subtracting ten hours for the proposal not to require restatement of
information that has not changed from the prior report, adding two
hours for the proposal to require references to rules and policies,
and one hour for the proposal to require that the report include
documentation of the process of providing the report to the board,
for a net burden per respondent of 73 hours. The recordkeeping
burden is covered by OMB Control No. 3038-0076 and it is not
affected by the proposal.
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Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 73.
Estimated gross annual reporting burden: 1,168.
b. Cross-Margining Programs
The Commission is proposing to add Sec. 39.13(i), which would set
forth the procedure for DCOs to submit information related to their
proposed cross-margining programs with other DCOs (or other clearing
organizations). Proposed Sec. 39.13(i) would specify the information
that a DCO would need to provide to the Commission regarding its cross-
margining program and require that the DCO submit this information as
part of a rule filing submitted for Commission approval pursuant to
Sec. 40.5. The rule submission filing is covered by OMB control number
3038-0093, which reflects that there are 50 reports annually and that
it takes 2 hours per response. The Commission is of the view that to
the extent that the cross-margining program would be submitted as part
of a new rule or rule amendment filing pursuant to Sec. 40.5, the
proposed changes is already covered by OMB control number 3038-0093 and
there is no change in the burden estimates.
c. Financial Resources Reporting
i. Annual Financial Reports
Existing Sec. 39.11(f) requires DCOs to provide to the Commission
quarterly reports of their financial resources, and Sec. 39.19(c)(3)
requires DCOs to prepare and submit audited annual financial
statements. The Commission is proposing to add Sec. 39.11(f)(2), which
would incorporate in Sec. 39.11 the annual reporting requirement that
currently exists in Sec. 39.19(c)(3). This change simply moves the
existing requirement to a different location, and does not alter the
existing information collection burden associated with this
requirement. Accordingly, the burden for annual financial reports is
being moved from OMB control number 3038-0069 to OMB control number
3038-0076, and the burden for quarterly financial reports is being
moved from OMB control number 3038-0066 to OMB control number 3038-
0076. The Commission is cancelling OMB control numbers 3038-0069 and
3038-0066.
The Commission also is proposing to require in Sec. 39.11(f)(2)
that, concurrently with filing the required annual financial report, a
DCO also provide: (1) A reconciliation, including appropriate
explanations, of its balance sheet in the certified annual financial
statements with the DCO's most recent quarterly report when material
differences exist or, if no material differences exist, a statement so
indicating, and (2) such further information as may be necessary to
make the required statements not misleading. The Commission estimates
that the proposed change would add an additional 20 hours per report,
and 320 hours in the aggregate, to the current burden of 2,606 hours
per respondent, and 41,696 hours, in OMB control number 3038-0069,
which as noted above, is being moved to OMB control number 3038-0076.
Finally, the Commission is proposing in Sec. 39.11(f)(2)(i) that
the annual report be required to identify the DCO's own capital
allocated to the DCO's compliance with Sec. 39.11(a)(1), and also
identify each of the DCO's financial resources allocated to the DCO's
compliance with Sec. 39.11(a)(2). The Commission estimates that the
proposed change would add an additional 14 hours per report and 224
hours in the aggregate to the current burden of 2,606 hours per
respondent, and 41,696 hours, in OMB control number 3038-0069, which as
noted above, is being moved to OMB control number 3038-0076.
The Commission estimates that the aggregate result of these changes
will be to increase the information collection burden associated with
annual financial reports from 2,606 hours to 2,640 hours for each DCO.
The revised estimated aggregate burden for the audited annual financial
statements is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2,640.
Estimated gross annual reporting burden: 42,240.
[[Page 22250]]
ii. Quarterly Financial Reports
The Commission is proposing to remove from Sec. 39.11(f)(3) the
requirement that certain documentation be filed quarterly; instead,
DCOs would only need to include the information in their first
quarterly report submission and upon any subsequent change, for an
expected reduction of three hours per report. Proposed Sec.
39.11(f)(1)(v) would require a DCO to identify in its quarterly report
the financial resources allocated to meeting its obligations under
Sec. 39.11(a)(1) and (2), with an expected increase of one hour per
report. The Commission has adjusted the existing burden hours for
quarterly reporting to reflect these proposed changes, which result in
an overall reduction in burden of two hours per report from the total
estimated burden reflected in OMB control number 3038-0066. The
estimated aggregate burden for the quarterly reports, as amended by the
proposal is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 4.
Average number of hours per report: 8.
Estimated gross annual reporting burden: 512.
The Commission is also proposing to amend Sec. 39.11(f)(1)(ii),
which requires a DCO to file with the Commission a financial statement
of the DCO or of its parent company. The Commission is proposing to
amend Sec. 39.11(f)(1)(ii) to require that the financial statement
provided be that of the DCO and not the parent company. The Commission
is further proposing to amend the periodic financial reporting
requirements in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to permit quarterly
and annual financial statements to be prepared in accordance with U.S.
GAAP for DCOs incorporated or organized under U.S. law and in
accordance with either U.S. GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign country. These changes are not
expected to affect the burden.
d. Daily Reporting
The Commission is proposing to amend Sec. 39.19(c)(1)(i)(A)-(C),
which requires a DCO to report margin, cash flow, and position
information by house origin and separately by customer origin, to
report this information by individual customer account as well. The
Commission is also proposing to amend Sec. 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day position information, DCOs
must report both unadjusted and risk-adjusted position information. The
burden associated with these proposed changes is anticipated to result
in an increase from 0.1 to 0.5 hours per report, and 2,000 in the
aggregate. The burden increase for daily financial reports is being
moved from OMB control number 3038-0069 to OMB control number 3038-
0076.
Separately, the Commission is proposing changes to Sec.
39.19(c)(1)(i) that would codify relief previously granted to fully-
collateralized DCOs that would reduce their daily reporting burden by
not requiring information on initial margin, daily variation margin
payments, other daily cash flows, and end-of-day positions. The
proposed change would reduce the burden for fully-collateralized DCOs,
but would not affect the burden for the majority of DCOs that are
subject to daily reporting requirements. The revised aggregate burden
estimate for daily reporting being transferred to OMB control number
3038-0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 2,000.
The Commission is proposing amendments to Sec. 39.13(g)(8)(i)(B)
to require a DCO to have rules requiring its clearing members to report
customer information about futures (as well as swaps) to DCOs. This is
a new information collection that is not covered by an existing OMB
control number. The burden applicable to clearing members is estimated
as follows:
Estimated number of respondents: 64.
Estimated number of reports per respondent: 250.
Average number of hours per report: 0.2.
Estimated gross annual reporting burden: 3,200.
e. Event-Specific Reporting
Regulations 39.18(g) and (h) require a DCO to provide notice
regarding certain exceptional events or planned changes related to a
DCO's automated systems. These notice requirements are incorporated by
reference in Sec. 39.19(c)(4). Regulation 39.19(c)(4) also requires a
DCO to notify the Commission of the occurrence of other specified
events; for example, a decrease in financial resources or the default
of a clearing member. The information collection burden associated with
these notices required under Sec. 39.19(c)(4) is currently addressed
by OMB Control No. 3038-0069, but is being moved to OMB control number
3038-0076 and consolidated with the burden in OMB control number 3038-
0076 that is currently associated with Sec. 39.18(g) and (h). In
addition, the Commission is proposing to add to Sec. 39.19(c)(4)
several events for which DCOs will be required to provide notification
if such events occur.
The Commission is also proposing to amend Sec. 39.16(c)(2)(ii) to
require that a DCO provide immediate public notice of a declaration of
default on its website. The estimated burden of proposed Sec.
39.16(c)(2)(ii) is included in the estimate for event-specific
reporting because it would occur concurrently with the requirement
under Sec. 39.19(c)(4)(vii) that a DCO provide immediate notice to the
Commission regarding the default of a clearing member.
The burden associated with these proposed changes pursuant to Sec.
39.19(c)(4) is anticipated to result in an increase in the number of
reports by DCO per year on average, from four to 20, and a reduction in
the hour burden per response, which was previously overstated, from six
to 0.5 hours, because a DCO is required to provide a brief notice with
only the pertinent details of the incident. The aggregate revised
burden estimate of Sec. 39.19(c)(4) being transferred to OMB control
number 3038-0076 is as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 20.
Average number of hours per report: 0.5.
Estimated gross annual reporting burden: 160.
f. Public Information
The Commission is proposing to revise Sec. 39.21 to clarify that
information regarding the financial resource package available in the
event of a clearing member default, which a DCO is required to post on
its website pursuant to Sec. 39.21, should be updated at least
quarterly, consistent with the requirement in Sec. 39.11(f)(1)(i)(A)
to report this information to the Commission each fiscal quarter or at
any time upon Commission request. The Commission is also clarifying
that other information specified in Sec. 39.21 must be disclosed
separately on the DCO's website, and not provided solely in the DCO's
posted rulebook. This is a new information collection that is not
covered by an existing OMB control number. The proposed changes are
estimated to add an average of two hours per response, and eight hours
per respondent annually (4 quarterly reports x 2 hours per report) to
OMB control number 3038-0076, for an aggregate estimated burden as
follows:
[[Page 22251]]
Estimated number of respondents: 16.
Estimated number of reports per respondent: 4.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 128.
g. Governance
As noted above, the Commission is proposing to incorporate
governance provisions from subpart C, which only applies to a limited
subset of DCOs, into subpart B, which is applicable to all DCOs.
Therefore, the information collection burden currently associated with
the governance standards of Sec. 39.32, which results from required
disclosure of major board decisions and governance arrangements, has
been reallocated to Sec. 39.24. The burden associated with subpart C
governance provisions, which is currently covered by OMB control number
3038-0081, is being moved to OMB control number 3038-0076. The
aggregate burden of these requirements would increase because they will
be applicable to all registered DCOs. The new aggregate burden estimate
for proposed Sec. 39.24 that is associated with the required ongoing
disclosure of major board decisions and governance arrangements by
registered DCOs, including DCOs that are not currently subject to
subpart C, is estimated as follows:
Estimated number of respondents: 16.
Estimated number of reports per respondent: 6.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 288.
h. Legal Risk
Proposed changes to Sec. 39.27 would require a DCO that provides
clearing services outside the United States to ensure that the legal
opinion that a DCO must obtain to provide those services is accurate
and up to date. The new subsection also requires the DCO to submit an
updated legal memorandum to the Commission following all material
changes to the analysis or content contained in the memorandum. This
requirement would apply only to DCOs offering clearing services outside
the U.S. This is a new information collection that is not covered by an
existing OMB control number. The Commission expects that circumstances
necessitating submission of an updated legal memorandum will occur
infrequently, not more than once every three years, and has estimated
the aggregate burden as follows:
Estimated number of respondents: 1.
Estimated number of reports per respondent: 0.33.
Average number of hours per report: 20.
Estimated gross annual reporting burden: 6.6.
3. Subpart C--Provisions Applicable to SIDCOs and DCOs That Elect
To Be Subject to the Provisions of Subpart C
Because the Commission is proposing to remove and reserve Sec.
39.32 and Exhibit B of the subpart C Election Form and to move the
governance requirements to Form DCO and Sec. 39.24, the corresponding
information collection burden under Sec. 39.32, currently covered by
OMB control number 3038-0081 would be eliminated and the burden under
the subpart C Election Form would be reduced. Further, in consolidating
the burden for subpart C, currently in OMB control number 3038-0081,
with OMB control number 3038-0076, the Commission has reassessed the
burden for the subpart C Election Form, and is adjusting certain burden
hour estimates and numbers of respondents. Specifically, the Commission
is reducing the number of burden hours estimated for the certification
portion of the subpart C Election Form from 25 hours to 2 hours,
because the prior estimate overstated the burden necessary to prepare
the one-page certification. The burden that is currently estimated
separately for the certifications, exhibits, and supplements/amendments
to the subpart C Election Form have been combined because a DCO must
provide all the required information in order to submit a complete
subpart C Election Form.\81\
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\81\ The current burden for the subpart C Election Form exhibits
is 155 hours per response; 22 of these hours are being moved to the
Form DCO burden as discussed in the Form DCO section above, leaving
133 hours. Also, the Commission is reducing the burden currently
attributed to amendments to the subpart C Election Form and
consolidating it with the burden for supplemental information
because in practice, DCOs have not frequently filed amendments.
Consolidating the certification (2 hours), exhibits (133 hours), and
supplemental or amended information (45 hours) results in a burden
of 180 hours.
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Additionally, the Commission is proposing to update the estimated
numbers of respondents for subpart C to reflect the current number of
SIDCOs and subpart C DCOs, and a reduction, from five to one, in the
anticipated number of DCOs newly electing to be subject to subpart C.
The Commission is also updating the number of responses for the
rescission notices that must be provided to clearing members based on
an average of the current number of clearing members at subpart C DCOs.
The Commission also is combining burden estimates that previously were
estimated separately for SIDCOs only and for all subpart C DCOs; that
distinction was made in the initial implementation of subpart C but is
no longer necessary since the subpart C rules have been in place for
several years. The revised estimated aggregate reporting burden related
to the subpart C Election Form, notices and disclosure being
transferred to OMB control number 3038-0076 is as follows:
Subpart C Election Form
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 180.
Estimated gross annual reporting burden: 180.
Subpart C Withdrawal Notice
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 2.
Estimated gross annual reporting burden: 2.
Subpart C Rescission Notice
Estimated number of respondents: 1.
Estimated number of reports per respondent: 16.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 48.
PFMI Disclosures
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 200.
Estimated gross annual reporting burden: 200.
Quantitative Disclosures
Estimated number of respondents: 1.
Estimated number of reports per respondent: 1.
Average number of hours per report: 80.
Estimated gross annual reporting burden: 80.
Additionally, the Commission is proposing to add to Sec. 39.37 a
notification requirement regarding changes to the PFMI disclosure
framework for SIDCOs and subpart C DCOs, which is expected to increase,
by one hour, the existing information collection burden of 80 hours per
response. The aggregate estimated burden for Sec. 39.37 is stated
below:
Subpart C Disclosure Framework Requirements--Sec. 39.37
Estimated number of respondents: 9.
[[Page 22252]]
Estimated number of reports per respondent: 1.
Average number of hours per report: 81.
Estimated gross annual reporting burden: 729.
Because the Commission is moving all of the burden estimates for
subpart C from OMB control number 3038-0081 to OMB control number 3038-
0076 and cancelling information collection 3038-0081, the existing
burden estimates for Sec. Sec. 39.33, 39.36, 39.38, and 39.39, and
certain disclosures under Sec. 39.37, as updated to reflect the
current number of SIDCOs and subpart C DCOs, are restated below. In
addition, for the quantitative disclosures required under Sec. 39.37,
which may be updated as frequently as quarterly, the Commission has
updated the number of reports per respondent from one to four annually,
and has distributed the existing 35 burden hours among the four reports
(35/4 = 8.75, rounded to 9). The updated subpart C reporting burden
estimates for the changes to subpart C--Provisions is as follows:
Subpart C Financial and Liquidity Resource Documentation--Sec. 39.33
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 120.
Estimated gross annual reporting burden: 1080.
Subpart C Stress Test Results--Sec. 39.36
Estimated number of respondents: 9.
Estimated number of reports per respondent: 16.
Average number of hours per report: 14.
Estimated gross annual reporting burden: 2016.
Subpart C Quantitative Disclosures--Sec. 39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 4.
Average number of hours per report: 9.
Estimated gross annual reporting burden: 324.
Subpart C Transaction, Segregation and Portability Disclosures--Sec.
39.37
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 35.
Estimated gross annual reporting burden: 315.
Subpart C Efficiency and Effectiveness Review--Sec. 39.38
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 3.
Estimated gross annual reporting burden: 27.
Subpart C Recovery and Wind-down Plan--Sec. 39.39
Estimated number of respondents: 9.
Estimated number of reports per respondent: 1.
Average number of hours per report: 480.
Estimated gross annual reporting burden: 4,320.
With respect to the subpart C recordkeeping burden that the
Commission is moving from OMB control number 3038-0081 to OMB control
number 3038-0076, the Commission also has combined the burden estimates
for financial and liquidity resources, and liquidity resource due
diligence and testing because these requirements apply to the same set
of respondents. As noted above, the general recordkeeping requirements
that were previously estimated separately for SIDCOs and all subpart C
DCOs also have been combined. The updated subpart C recordkeeping
burden estimates are restated below:
Subpart C Recordkeeping--General
Estimated number of respondents: 9.
Estimated number of reports per respondent: 110.
Average number of hours per report: 10.
Estimated gross annual recordkeeping burden: 9,900.
Subpart C Recordkeeping--Financial and Liquidity Resources, Liquidity
Resource Due Diligence and Testing
Estimated number of respondents: 9.
Estimated number of reports per respondent: 8.
Average number of hours per report: 10.
Estimated gross annual recordkeeping burden: 720.
Request for Comment
The Commission invites the public and other Federal agencies to
comment on any aspect of the proposed information collection
requirements discussed above. The Commission will consider public
comments on this proposed collection of information in:
(1) Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
(2) Evaluating the accuracy of the estimated burden of the proposed
collection of information, including the degree to which the
methodology and the assumptions that the Commission employed were
valid;
(3) Enhancing the quality, utility, and clarity of the information
proposed to be collected; and
(4) Minimizing the burden of the proposed information collection
requirements on registered entities, including through the use of
appropriate automated, electronic, mechanical, or other technological
information collection techniques, e.g., permitting electronic
submission of responses.
Copies of the submission from the Commission to OMB are available
from the CFTC Clearance Officer, 1155 21st Street, NW, Washington, DC
20581, (202) 418-5160 or from https://RegInfo.gov. Organizations and
individuals desiring to submit comments on the proposed information
collection requirements should send those comments to:
The Office of Information and Regulatory Affairs, Office
of Management and Budget, Room 10235, New Executive Office Building,
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures
Trading Commission;
(202) 395-6566 (fax); or
[email protected] (email).
Please provide the Commission with a copy of submitted comments so
that all comments can be summarized and addressed in the final
rulemaking, and please refer to the ADDRESSES section of this
rulemaking for instructions on submitting comments to the Commission.
OMB is required to make a decision concerning the proposed information
collection requirements between 30 and 60 days after publication of
this release in the Federal Register. Therefore, a comment to OMB is
best assured of receiving full consideration if OMB receives it within
30 calendar days of publication of this release. Nothing in the
foregoing affects the deadline enumerated above for public comment to
the Commission on the proposed rules.
C. Cost-Benefit Considerations
1. Introduction
Section 15(a) of the CEA requires the Commission to consider the
costs and benefits of its actions before promulgating a regulation
under the
[[Page 22253]]
CEA or issuing certain orders.\82\ Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of the following
five broad areas of market and public concern: (1) Protection of market
participants and the public; (2) efficiency, competitiveness, and
financial integrity of futures markets; (3) price discovery; (4) sound
risk management practices; and (5) other public interest
considerations. The Commission considers the costs and benefits
resulting from its discretionary determinations with respect to the
section 15(a) factors (collectively referred to herein as section 15(a)
factors). The Commission has not identified any impact that the
proposed changes to part 39 would have on price discovery. The impact
the proposed changes to part 39 would have on the other section 15(a)
factors is considered below.
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\82\ 7 U.S.C. 19(a).
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The Commission recognizes that the proposed rules may impose costs.
The Commission has endeavored to assess the expected costs and benefits
of the proposed rulemaking in quantitative terms, including PRA-related
costs, where possible. In situations where the Commission is unable to
quantify the costs and benefits, the Commission identifies and
considers the costs and benefits of the applicable proposed rules in
qualitative terms. The lack of data and information to estimate those
costs is attributable in part to the nature of the proposed rules.
Additionally, the initial and recurring compliance costs for any
particular DCO will depend on the size, existing infrastructure, level
of clearing activity, practices, and cost structure of the DCO.
The Commission notes that this consideration is based on its
understanding that centralized clearing activity functions
internationally with (i) clearing activity that involves U.S. firms
occurring across different international jurisdictions; (ii) some
entities organized outside the U.S. that are prospective or current
Commission registrants; and (iii) some entities typically operating
both within and outside of the U.S. who follow substantially similar
business practices wherever located. Where the Commission does not
specifically refer to matters of location, its discussion of costs and
benefits refers to the effects of the proposed rules on all activity
subject to it, whether by virtue of the activity's physical location in
the United States or by virtue of the activity's connection with or
effect on U.S. commerce under section 2(i) of the CEA. In particular,
the Commission notes that some DCOs subject to the proposed rules are
located outside of the United States.
The Commission generally requests comment on all aspects of its
cost-benefit considerations, including the identification and
assessment of any costs and benefits not discussed herein; the
potential costs and benefits of the alternatives discussed herein; data
and any other information to assist or otherwise inform the
Commission's ability to quantify or qualitatively describe the costs
and benefits of the proposed rules; and substantiating data,
statistics, and any other information to support positions posited by
commenters with respect to the Commission's discussion. The Commission
welcomes comment on such costs, particularly from existing DCOs that
can provide quantitative cost data based on their respective
experiences. Commenters may also suggest other alternatives to the
proposed approach.
2. Baseline
The baseline for the Commission's consideration of the costs and
benefits of this proposed rulemaking are: (1) The DCO Core Principles
set forth in section 5b(c)(2) of the CEA; (2) the general provisions
applicable to DCOs under subparts A and B of part 39 of the
Commission's regulations; (3) the Commission's regulations in subpart C
of part 39, which establish additional standards for compliance with
the core principles for those DCOs that are designated as SIDCOs or
have elected to opt-in to the subpart C requirements in order to
achieve status as a QCCP; (4) Form DCO in appendix A to part 39; (5)
subpart C Election Form in appendix B to part 39; and (6) Sec. Sec.
1.20(d) and 140.94.
The Commission notes that some of the proposed rules would codify
existing no-action relief and other guidance issued by Commission
staff. To the extent that market participants have relied upon such
relief or staff guidance, the actual costs and benefits of the proposed
rules, as discussed in this section of the proposal, may not be as
significant.
3. Written Acknowledgment From Depositories--Sec. 1.20
a. Benefits
Regulation 1.20(d)(1) requires an FCM to obtain a written
acknowledgment from each depository with which the FCM deposits futures
customer funds. The regulation provides that an FCM is not required to
obtain a written acknowledgment from a DCO that has adopted rules
providing for the segregation of customer funds, but other provisions
of Sec. 1.20(d) seem to suggest that a DCO must provide the written
acknowledgment regardless. The Commission is proposing to amend Sec.
1.20(d) to clarify the Commission's intent that the requirements listed
in Sec. 1.20(d)(3) through (6) do not apply to a DCO, or to an FCM
that clears through that DCO, if the DCO has adopted rules that provide
for the segregation of customer funds. The Commission believes this
will benefit FCMs and DCOs by reducing uncertainty as to when an FCM
must obtain a written acknowledgment from a DCO.
b. Costs
The Commission does not believe the proposed amendment would impose
any additional costs on DCOs or FCMs, as it is clarifying the
circumstances under which an acknowledgment letter would not be
required.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(B) of the CEA, the Commission believes that the proposed
amendments to Sec. 1.20(d) would not negatively impact the protection
of market participants and the public, including DCOs' clearing members
and their customers, as the proposed amendment merely clarifies the
instances in which a DCO, or an FCM that clears through that DCO, would
not need to file an acknowledgment letter because the DCO has adopted
rules that provide for the segregation of customer funds. The
Commission believes that the proposed amendment to Sec. 1.20(d) will
result in an incremental increase in efficiency for FCMs that follows
from reducing any previous uncertainty regarding when they must obtain
an acknowledgement letter. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
proposed amendment.
4. Definitions--Sec. 39.2
Regulation 39.2 sets forth definitions applicable to terms used in
part 39 of the Commission's regulations. The Commission is proposing
amendments to the definition of ``business day,'' ``customer,''
``customer account or customer origin,'' and ``key personnel'' in Sec.
39.2 to maintain consistency with terms defined elsewhere in Commission
regulations and to provide clarity with respect to the use of these
terms. The Commission is also adding new definitions for ``enterprise
risk
[[Page 22254]]
management'' and ``fully-collateralized position'' to correspond with
amendments that the Commission is proposing elsewhere in part 39.
a. Benefits
The Commission believes the proposed amendments to Sec. 39.2 would
benefit DCOs by clarifying existing part 39 requirements, such as what
constitutes a Federal holiday for purposes of applying the definition
of ``business day.'' The Commission believes the newly proposed
definitions in Sec. 39.2 for ``enterprise risk management'' and
``fully-collateralized positions'' are necessary to understanding the
proposed rules for an enterprise risk management framework in proposed
Sec. 39.10(d) and proposed exceptions from several requirements for
fully-collateralized positions throughout part 39. The proposed
amendments to the definitions of ``customer'' and ``customer account or
customer origin'' would also help to avoid conflicts with similar terms
defined in Sec. 1.3.
b. Costs
The Commission does not believe the proposed new and amended
definitions would impose additional costs on DCOs, as they are not
imposing additional requirements, but rather defining terms that are
used in other provisions.
c. Section 15(a) Factors
In addition to the discussion above, the Commission evaluated the
costs and benefits in light of the specific considerations identified
in section 15(a) of the CEA. The Commission believes that DCOs may
experience a modest increase in efficiency as a result of the proposed
amendments. In consideration of section 15(a)(2)(B) of the CEA, the
Commission believes that, to the extent that the amended definitions
provide clarity, reduce any previous uncertainty, or help to avoid
conflicts with similar terms that are defined in different sections,
these effects, individually and in aggregate, may yield increased
efficiency. For example, the Commission believes the proposed
amendments to the definition of ``business day'' in Sec. 39.2 will
better enable DCOs, particularly those located outside of the United
States, to easily identify Federal holidays as it relates to their
compliance with applicable reporting requirements under part 39. The
proposed amendments to Sec. 39.2 would also provide foreign DCOs with
greater clarity by excluding ``foreign holidays'' from the definition
of ``business day,'' thereby eliminating the requirement to report to
the Commission on a non-trading day. After considering the other
section 15(a) factors, the Commission believes they are not implicated
by the proposed amendments.
5. Procedures for Registration--Sec. 39.3 and Form DCO
The Commission is proposing several changes to its procedures for
DCO registration, including: The manner by which a DCO applicant would
file supplemental information in proposed Sec. 39.3(a)(3); procedures
in proposed Sec. 39.3(a)(4) to amend a pending application; the
potential for an extension of the application review period in proposed
Sec. 39.3(a)(6); and the procedures for filing a request for an
amended order of registration in proposed Sec. 39.3(d). The Commission
is also proposing to codify the statutory requirements in section 7 of
the CEA to vacate an order of registration as well as specify the types
of information that a DCO must provide to the Commission in this regard
in proposed Sec. 39.3(f); and clarify the types of information that a
DCO must provide to request a transfer of open interest in proposed
Sec. 39.3(g). In addition, the Commission is proposing to revise Form
DCO to correspond with proposed amendments to part 39 and to reflect
Commission staff's experience with DCO applications.
a. Benefits
The Commission believes the proposed amendments to the DCO
registration procedures in Sec. 39.3 and Form DCO will make the
procedures more transparent to applicants. This should allow
prospective DCO applicants to more efficiently prepare complete
applications, which should reduce the need for Commission staff to
request additional information after receiving the application and
therefore reduce the overall time needed to review an application. For
example, the Commission is modifying Form DCO to clarify the types of
information that are required and align the exhibits with the
amendments proposed under part 39. These proposed amendments may reduce
an applicant's time and resources used in responding to staff inquiries
during the application review process, as DCO applicants would be
better able to provide more complete, accurate, and nuanced application
materials. The proposed amendments to Sec. 39.3 would also adapt
certain language to better reflect terminology applicable to DCOs in
proposed Sec. 39.3(a)(1) and (2) and (b), which could help to avoid
confusion for potential DCO applicants and existing DCOs. Furthermore,
the Commission is proposing to codify its long-standing procedures for
staying an application in proposed Sec. 39.3(a)(6) to provide DCO
applicants with greater transparency of the registration process.
The Commission is proposing to amend Sec. 39.3(a)(2) and Form DCO
to eliminate the required use of Form DCO to request an amended order
of registration from the Commission. This change would better reflect
current practice, where a DCO is permitted to file a request for an
amended order with the Commission rather than submitting Form DCO.
Similarly, the Commission is proposing to specify in proposed Sec.
39.3(f) the types of information that the Commission currently requests
to determine whether to vacate an order of registration, which would
provide DCOs with more transparency as to the types of information that
are required as part of a request to vacate an order of registration.
The proposed recordkeeping requirements in Sec. 39.3(f)(1)(iii) and
(iv), which would require a vacated DCO to continue to maintain the
books and records that it would otherwise be required to maintain as a
registered DCO, would provide the benefit of ensuring that a DCO does
not vacate its registration and destroy its books and records in order
to hinder or avoid Commission action.
The Commission also proposes to streamline the procedures for
requesting a transfer of open interest by separating those procedures
in existing Sec. 39.3(g) from the procedures to notify the Commission
of a DCO corporate structure or ownership change. Under the proposed
amendments to Sec. 39.3(g), a DCO seeking to transfer its open
interest would be required to submit rules for Commission approval
pursuant to Sec. 40.5, rather than submitting a request for an order
at least three months prior to the anticipated transfer. This would
simplify the existing requirements and permit the transfer to take
effect after a 45-day Commission review period. The Commission believes
the 45-day period would ensure that clearing members are made aware of
the intended transfer and allow the Commission to determine whether the
transferee DCO is suitable to accept the transfer.
b. Costs
The Commission believes DCOs would not incur any additional costs
associated with the proposed procedures to request an amended order of
registration in Sec. 39.3(d), as a DCO would incur the same costs if
requesting to amend its order of registration by
[[Page 22255]]
using the current Form DCO.\83\ As to the procedures to vacate a DCO's
registration in proposed Sec. 39.3(f), the Commission believes the
costs would not be substantial. Any costs incurred by DCOs would more
likely be due to the proposed recordkeeping requirements in Sec.
39.3(f)(1)(iii) and (iv), which would require a vacated DCO to continue
to maintain the books and records that it would otherwise be required
to maintain as a registered DCO pursuant to Sec. 1.31(b).
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\83\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.1 above.
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Finally, the Commission is proposing to amend Sec. 39.3(g) to
permit a DCO seeking to transfer its open interest to submit rules for
Commission approval pursuant to Sec. 40.5, rather than submitting a
request for an order at least three months prior to the anticipated
transfer. The Commission does not anticipate that DCOs would incur any
additional costs as a result of these procedural changes beyond the
costs to prepare a Sec. 40.5 rule submission, which are likely to be
similar to the costs of requesting an order approving the transfer.
Additionally, the information requested in proposed Sec. 39.3(g)
reflects information that DCOs are already required to provide in order
to transfer their open interest. The Commission does not believe DCOs
would incur additional costs from any of the other proposed amendments
to the DCO registration procedures in Sec. 39.3.
c. Section 15(a) Factors
In addition to the discussion above, the Commission evaluated the
costs and benefits in light of the specific considerations identified
in section 15(a) of the CEA. The Commission believes that the proposed
changes to the registration procedures will maintain the protection of
market participants and the public by ensuring that DCOs are in
compliance with the DCO Core Principles and Commission regulations. The
proposed changes would also increase efficiency by making the
registration process more transparent. This would enable DCOs and DCO
applicants to provide more complete documentation in a more concise
manner, thereby reducing the time and resources needed to comply with
such procedures. To the extent that the proposed changes to the
registration procedures act to streamline the application process, as
well as to establish the process for vacating a DCO's registration, the
net result of those changes would be a more efficient process for
registering as a DCO and for vacating that registration.
Additionally, the Commission believes that the proposed amendments
to Sec. 39.3(g), which addresses a request to transfer a DCO's open
interest, will result in increased efficiency because the proposed
amendments streamline and improve the existing process, as DCOs would
be able to use the existing process under Sec. 40.5, with which DCOs
are already familiar and which requires a shorter review period. As a
result, DCOs may obtain approval to transfer their open interest in a
timelier manner, which may benefit their operational and business
needs. To that end, the Commission believes that these changes will
have a beneficial effect on the risk management practices of DCOs,
inasmuch as the proposed changes may modestly reduce the risks that may
accompany the transfer of open interest to another DCO. Moreover, the
proposed recordkeeping requirements for vacated DCOs will protect
market participants and the public by ensuring that a DCO does not
vacate its registration and destroy its books and records in order to
hinder or avoid Commission action. The Commission has considered the
other section 15(a) factors and believes that they are not implicated
by the proposed amendments.
6. DCO Chief Compliance Officer--Sec. 39.10(c)
a. Benefits
The Commission is proposing to amend Sec. 39.10(c) to allow a DCO
to have its CCO report to the senior officer responsible for the DCO's
clearing activities. This would provide DCOs with flexibility to
structure the management and oversight of the CCO based on the DCO's
particular corporate structure, size, and complexity. This may increase
efficiency, reduce costs, and improve the quality of the oversight of
the CCO, as the senior officer overseeing the DCO's clearing activities
would be better positioned to provide day-to-day oversight of the CCO.
The Commission is proposing to amend certain requirements in Sec.
39.10(c) relating to the CCO annual report to permit DCOs to
incorporate by reference, for up to five years, any descriptions of
written policies and procedures that have not materially changed since
they were described within the most recent CCO annual report. The
ability to incorporate by reference the description of written policies
and procedures in the CCO annual report could reduce the time and costs
needed to prepare the CCO annual report.\84\ The Commission is also
proposing to remove the requirement that the DCO submit the CCO annual
report at the same time as the DCO's fiscal year-end audited financial
statement. This is consistent with the proposed change to Sec.
39.19(c)(3)(iv), which would allow DCOs the flexibility to submit
required annual reports and audited year-end financial statements when
ready but not later than 90 days after the end of the DCO's fiscal
year. The proposed changes recognize that the DCO's year-end audited
financial statements are prepared separately from the CCO annual report
and therefore would not need to be prepared and submitted together.
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\84\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.2.a above.
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b. Costs
The Commission is proposing to amend Sec. 39.10(c) to require that
a DCO identify its compliance policies and procedures by name, rule
number, or other identifier; describe the process by which the annual
report was submitted to the board of directors or senior officer; and
allow incorporation by reference in limited circumstances. The
Commission notes that a number of DCOs already provide this
information. Therefore, the Commission expects that the proposed
changes to Sec. 39.10(c) would not impose additional costs on those
DCOs.\85\
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\85\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.2.a above.
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c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that certain of the
proposed changes to Sec. 39.10(c) will enhance the protection of
market participants and the public. Specifically, the proposed changes
to a CCO's reporting lines, along with the added clarity regarding
proper identification of the compliance policies and procedures in the
CCO annual report, is anticipated to enhance the compliance function at
DCOs, which may have the corresponding effect of improving the
protections for market participants and the public. Additionally, in
consideration of section 15(a)(2)(B) of the CEA, the proposed amendment
to permit incorporation by reference in the CCO annual report will
[[Page 22256]]
increase efficiency in preparing that report. The Commission has
considered the other section 15(a) factors and believes that they are
not implicated by the proposed amendments.
7. Enterprise Risk Management--Sec. 39.10(d)
a. Benefits
The Commission is proposing Sec. 39.10(d) to require a DCO to have
a program of enterprise risk management that identifies and assesses
sources of risk and their potential impact on the operations and
services of the DCO and identify an enterprise risk officer. The
Commission believes that requiring DCOs to establish and maintain an
enterprise risk management program in proposed Sec. 39.10(d) may
encourage DCOs to strengthen their existing programs, especially if a
DCO lacks an enterprise risk management program that is commensurate
with industry best practices. This may benefit the resiliency of
individual DCOs' operations by requiring DCOs to proactively identify
potential risks on an enterprise-wide basis beyond those that a DCO
might otherwise identify pursuant to its compliance with specific
requirements in part 39. Compliance with proposed Sec. 39.10(d) by
DCOs who are affiliated with other registered entities such as DCMs,
SEFs, and SDRs could also benefit the financial markets more broadly,
as risks identified and addressed by the DCO may also apply to their
affiliates within the derivatives markets.
Consistent with Sec. 39.10(b), the Commission does not intend to
be overly prescriptive by requiring specific standards and
methodologies. Proposed Sec. 39.10(d)(3) would require a DCO to follow
generally accepted standards and industry best practices with respect
to the development and ongoing monitoring of its enterprise risk
management framework, assessment of the performance of the enterprise
risk management program, and the management and mitigation of risk to
the DCO. The Commission is mindful that best practices evolve and
change over time and does not, therefore, wish to prescribe specific
standards in its regulations. This flexibility would allow DCOs to
continue to develop enterprise risk management programs in a manner
best suited for their specific risk exposures, product types, customer
bases, market segments, and organizational structures, among other
things, as long as their programs meet the proposed minimum standards
and any other legal and regulatory requirements.
b. Costs
The Commission has found that DCOs that proactively identify and
manage foreseeable risks have generally implemented enterprise risk
management frameworks, in whole or in part, to identify, assesses, and
manage sources of risk in a manner similar to the requirements proposed
in Sec. 39.10(d)(1)-(4). Therefore, the Commission believes that any
additional costs associated with these requirements should be minimal
relative to existing industry practice for those DCOs whose enterprise
risk management programs are commensurate with industry best practices.
Additionally, as DCOs would be able to comply with this requirement by
including the DCO in the enterprise risk management program
administered by the DCO's parent company or affiliate, the Commission
believes any additional costs to comply with proposed Sec. 39.10(d)
could be reduced if the DCO is able to share the costs of compliance
with its parent or affiliates. DCOs that do not have an enterprise risk
management program in line with proposed Sec. 39.10(d) or could not
otherwise rely on its parent's or affiliate's enterprise risk
management program would incur costs to implement such a program.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes that the proposal to
require a DCO to have a formal enterprise risk management program will
improve DCO risk management practices by ensuring that DCOs have a
process for identifying and assessing potential risks to the DCO on an
enterprise-wide basis, thereby enhancing protection of market
participants and the public and the financial integrity of the
derivatives markets. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the proposed
amendments.
8. Financial Resources--Sec. 39.11
a. Benefits
The Commission is proposing certain changes to Sec. 39.11,
including: Clarifying how a DCO's largest financial exposure should be
calculated in proposed Sec. 39.11(c)(2); requiring a DCO to use the
same stress test scenario to combine the customer and house stress test
losses of each clearing member in proposed Sec. 39.11(c)(2)(ii); and
requiring a DCO to adopt rules to specifically permit the netting of
any gains in the house account with customer losses in the event of a
member default (and prohibiting a DCO from netting losses in the house
account with gains in the customer account consistent with section 4d
of the CEA, which requires the segregation of customer funds) in
proposed Sec. 39.11(c)(2)(iii).
The Commission believes these proposed adjustments to the
methodology used to calculate a DCO's financial resources requirement
in Sec. 39.11(c) would focus a DCO's analysis on the resources that
would actually be available to it during times of stress. This approach
is consistent with recent guidance issued by CPMI-IOSCO suggesting
that, when assessing the adequacy of their financial resources, CCPs
should take into account only prefunded financial resources and ignore
voluntary excess contributions. CCPs that wish to be considered QCCPs
are expected to follow this guidance, so having Commission requirements
that are consistent with the guidance would benefit DCOs.
Regulation 39.11(d)(2) sets out certain conditions that apply to a
DCO's use of assessments for additional guaranty fund contributions in
calculating the financial resources available to meet its obligations
under Sec. 39.11(a)(1). Regulation 39.11(d)(2)(iv) provides that a DCO
shall only count the value of assessments, after a 30 percent haircut,
``to meet up to 20 percent of those obligations.'' The Commission
proposes to amend Sec. 39.11(d)(2) to replace the phrase ``those
obligations'' with ``the total amount required under paragraph (a)(1)
of this section,'' to provide DCOs with more clarity as to how to
comply with this requirement.
Furthermore, the Commission is proposing amendments to Sec.
39.11(e)(1)(iii) and (e)(3) to clarify that a DCO may use a committed
line of credit or similar facility, in whole or in part, to satisfy
Sec. 39.11(e)(1)(ii) or (e)(2), as long as the committed line of
credit or similar facility is not counted twice to meet the
requirements of Sec. 39.11(e)(1)(ii) and (e)(2). This is a
clarification of the existing requirement, which provides a DCO with
additional flexibility to optimize the liquidity resources it holds,
which would potentially reduce certain opportunity costs associated
with holding more expensive types of liquid resources, such as cash.
Regulation 39.11(f)(1)(ii) requires a DCO to file with the
Commission a financial statement of the DCO or of its
[[Page 22257]]
parent company. The Commission is proposing to amend Sec.
39.11(f)(1)(ii) to require that the financial statement provided be
that of the DCO and not the parent company in order to better and more
accurately assess the financial strength of the DCO. The Commission
believes it would also benefit the DCO to be able to assess its
compliance with Core Principle B and Sec. 39.11 and its financial
health separately from that of its parent.
The Commission is proposing to amend the periodic financial
reporting requirements in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to permit
quarterly and annual financial statements to be prepared in accordance
with U.S. GAAP for DCOs incorporated or organized under U.S. law and in
accordance with either U.S. GAAP or IFRS for DCOs incorporated or
organized under the laws of any foreign country. Although Commission
regulations generally require financial statements to be prepared in
accordance with U.S. GAAP, the Commission has permitted the use of IFRS
by non-U.S. DCOs as a condition of each DCO's registration order. The
proposed rule would retain this flexibility for non-U.S. DCOs and
provide greater transparency to DCOs and DCO applicants of the
financial reporting requirements.
In reviewing DCOs' financial statements, Commission staff has noted
that the DCO's own capital allocated to meet the requirements of Sec.
39.11(a)(1) or (2) often are not identified accordingly. The Commission
therefore is proposing in Sec. 39.11(f)(1)(ii) and (f)(2)(i) to
require that assets allocated by the DCO for such purpose must be
clearly identified on the DCO's balance sheet as held for that purpose.
As a result, DCOs would have the opportunity to more clearly
demonstrate that they have satisfied the requirements of Sec.
39.11(a)(1) or (2) and, in doing so, may avoid unnecessary follow-up
questions from Commission staff.
The Commission also is proposing to require in Sec. 39.11(f)(2)
that, in addition to its audited year-end financial statement, a DCO
would be required to submit: (1) A reconciliation, including
appropriate explanations, of its balance sheet when material
differences exist between it and the balance sheet in the DCO's
financial statement for the last quarter of the fiscal year or, if no
material differences exist, a statement so indicating, and (2) such
further information as may be necessary to make the statements not
misleading. Without such an explanation, Commission staff may be under
the impression that the representations are false or incorrect. This
requirement gives DCOs the opportunity to correct any discrepancies and
avoid unnecessary follow-up questions from Commission staff.
Regulation 39.11(f)(3) requires a DCO to provide to the Commission
documentation of the DCO's financial resources methodology and basis
for valuation and liquidity determinations as part of its quarterly
financial reporting. The Commission is proposing to revise Sec.
39.11(f)(3) to provide that a DCO must send this documentation to the
Commission only upon the DCO's first submission under Sec. 39.11(f)(1)
and in the event of any change thereafter. Not requiring this
documentation to be provided each quarter could reduce a DCO's
reporting costs.\86\
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\86\ The Commission estimates for PRA purposes that there would
be a reduction in the burden incurred by DCOs, as discussed in
section IX.B.2.c.ii above.
---------------------------------------------------------------------------
The Commission is proposing to amend Sec. 39.11(f)(4) to require
that DCOs provide a certification as to the accuracy and completeness
of the DCO's quarterly financial report filed pursuant to proposed
Sec. 39.11(f)(1), annual report filed pursuant to proposed Sec.
39.11(f)(2), and any other reports filed pursuant to proposed Sec.
39.11(f)(3). The Commission believes a certification requirement will
provide greater transparency with regard to the submission process and
may increase the level of accountability at the DCO, which may lead to
greater accuracy in reporting.
b. Costs
DCOs could incur initial costs to recalibrate the method by which
they compute their financial resources to comply with proposed Sec.
39.11(c). If a DCO does not have financial resources sufficient to
comply with Sec. 39.11(a)(1) based on its computation pursuant to
proposed Sec. 39.11(c), the DCO would have to procure additional
financial resources. Because DCOs vary in terms of their size and level
of clearing activity, the Commission believes they are better
positioned to provide cost estimates in this regard.
DCOs may incur costs to prepare their own financial statements (as
opposed to financial statements of the parent company) in accordance
with proposed Sec. 39.11(f)(1)(ii). For DCOs that already prepare
their own financial statements, incremental costs will not be as large
as suggested by the regulatory baseline. DCOs may incur minimal costs
in identifying in their balance sheet assets allocated to meet the
requirements of Sec. 39.11(a)(1) or (2). DCOs may also incur minimal
costs to prepare a reconciliation of their balance sheet when material
differences exist as compared to the DCO's financial statement for the
last quarter of the fiscal year.
The Commission believes DCOs may incur additional costs associated
with complying with the proposed certification requirements in Sec.
39.11(f)(4). These costs may be reduced for DCOs that already provide
them. The Commission recognizes that a DCO may have to develop a
process in certifying its financial reports; however, the Commission
believes that these costs may be reduced for DCOs to the extent that
they already have this process in place.\87\
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\87\ See 17 CFR 228, 229, 232, 240, 249, 270 and 274.
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c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.11 will result in improved protections for
market participants and the public. Specifically, the proposed
adjustments to the methodology used to calculate a DCO's financial
resources requirement in Sec. 39.11(c) and the corresponding
improvements to a DCO's stress testing results are expected to enhance
the safety and soundness of DCOs and their ability to manage their
risks, thereby better protecting DCOs' clearing members and their
customers, market participants, and the public. Additionally, in
further consideration of section 15(a)(2)(A) of the CEA, the proposal
to require in Sec. 39.11(f)(1)(ii) the financial statement of the DCO
and not that of its parent company, is expected to better and more
accurately assess the financial strength of the DCO, which will
ultimately serve to protect market participants and the public and
further the financial integrity of derivatives markets. In
consideration of section 15(a)(2)(B) of the CEA, the Commission
believes that, to the extent that the proposed amendments to Sec.
39.11 will result in increased clarity or transparency, as explained
above, those changes are anticipated to result in an incremental
increase in efficiency. In consideration of section 15(a)(2)(D) of the
CEA, the Commission believes the proposed adjustments to the
methodology used to calculate a DCO's financial resources requirement
in Sec. 39.11(c) would focus a DCO's analysis on the resources that
would actually be available to it during times of stress, thereby
improving the DCO's risk
[[Page 22258]]
management practices. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the proposed
amendments.
9. Participant and Product Eligibility--Sec. 39.12
Regulation 39.12(b)(2) provides that a DCO shall adopt rules
providing that all swaps with the same terms and conditions are
economically equivalent within the DCO. As it was not the intention of
the Commission to require DCOs that do not clear swaps to adopt the
rules required under this provision, the Commission is proposing to
revise Sec. 39.12(b)(2) so that it explicitly applies only to DCOs
that clear swaps. This could reduce rulebook drafting costs for future
DCO applicants that do not intend to accept swaps for clearing. The
Commission believes the proposed amendments to Sec. 39.12 would not
impose costs on DCOs or swaps market participants, as they would not be
clearing swaps through a DCO that does not accept swaps for clearing.
The Commission has considered the section 15(a) factors and believes
that they are not implicated by these proposed amendments.
10. Risk Management--Sec. 39.13
a. Benefits
Regulation 39.13(g)(2)(i) requires that a DCO have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios. The regulation
currently notes that such risks include but are not limited to jump-to-
default risk or similar jump risk. The Commission is proposing to amend
Sec. 39.13(g)(2)(i) to note that such risks also include
``concentration of positions.'' Recent events, including a significant
loss from a default at a central counterparty outside of the
Commission's jurisdiction, highlight the importance of addressing those
risks. This change would serve to benefit DCOs and their clearing
members by making the rule more explicit.
Regulation 39.13(g)(3) requires a DCO to have its systems for
initial margin requirements reviewed and validated by a qualified and
independent party on a regular basis. The Commission is proposing to
specify that ``on a regular basis'' means annually. Additionally, Sec.
39.13(g)(3) provides that an employee of the DCO may conduct such
independent validations as long as they are not responsible for the
development or operation of the systems and models being tested.
Proposed Sec. 39.13(g)(3) would expand the pool of eligible employees
to include employees of an affiliate of the DCO, which would provide
DCOs with greater flexibility in selecting appropriate staff to conduct
the validations.
Furthermore, the Commission is proposing new Sec. 39.13(g)(7)(iii)
to clarify that, in conducting back tests of initial margin
requirements, a DCO should compare portfolio losses only to those
components of initial margin that capture changes in market risk
factors. This proposal would ensure that back testing of a DCO's
initial margin model is more appropriately calibrated.
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). Based
on feedback received from DCOs, the Commission understands that there
are significant operational issues that may affect the ability of
clearing members to accurately determine the positions of individual
customers on an intraday basis with respect to certain types of
transactions (e.g., transfers, give-ups, and allocations of block
orders) and with respect to certain types of market participants (e.g.,
locals and high frequency traders). Therefore, intraday gross margin
calculations may result in some clearing members being charged too much
margin and others being charged too little margin, which could
necessitate significant end-of-day adjustments. Accordingly, the
Commission proposes to amend Sec. 39.13(g)(8)(i) to permit a DCO to
collect customer initial margin from its clearing members on a gross
basis only during its end-of-day settlement cycle. Proposed Sec.
39.13(g)(8)(i) is consistent with market feedback and attempts to
provide DCOs with more flexibility in meeting the requirements in light
of the operational issues that may arise intraday.
Regulation 39.13(g)(8)(ii) provides that a DCO must require its
clearing members to collect customer initial margin from their
customers, ``for non-hedge positions, at a level that is greater than
100 percent of the [DCO]'s initial margin requirements with respect to
each product and swap portfolio.'' Consistent with interpretative
guidance issued by the Division, the Commission is proposing to amend
Sec. 39.13(g)(8)(ii) to permit DCOs to establish customer initial
margin requirements based on the type of customer account and to apply
prudential standards that result in FCMs collecting customer initial
margin at levels commensurate with the risk presented by each customer
account. The proposed amendments to Sec. 39.13(g)(8)(ii) would give
DCOs reasonable discretion in determining the percentage by which
customer initial margin requirements must exceed the DCO's clearing
initial margin requirements with respect to particular products or
portfolios. This approach acknowledges that the existing standard does
not appropriately take into account each DCO's particular circumstances
and the nature of its clearing members and their customers.
Regulation 39.13(h)(1)(i) requires a DCO to impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the DCO's financial resources. The Commission
is proposing to note that such risk limits should also be imposed to
address positions that may be difficult to liquidate. As noted above,
recent events highlight the importance of imposing risk limits to
address positions that may be difficult to liquidate, particularly
concentrated positions. The proposed change would help to ensure that a
DCO can properly manage its risks in instances where, for example, a
position in a particular contract or swap is concentrated with a
particular member, such that there is reason to doubt whether, in the
event that this member defaults, other members would be willing and
able to accept, collectively, the entirety of that position or swap.
Regulation 39.13(h)(5)(ii) requires a DCO to, on a periodic basis,
review the risk management policies, procedures, and practices of each
of its clearing members, which address the risks that such clearing
members may pose to the DCO, and to document such reviews. The
Commission is proposing to clarify that DCOs should, having conducted
such reviews, take appropriate actions to address concerns identified
in such reviews, and require that the documentation of the reviews
should include the basis for determining what action was appropriate to
take. Absent such follow-up, the reviews would lack purpose. The
proposed change would help to ensure that DCOs are taking steps to
manage any risks posed by their members, thereby enhancing the DCO's
risk management functions.
b. Costs
The Commission is proposing to amend Sec. 39.13(g)(2)(i) to
clarify that a DCO shall have initial margin requirements that are
commensurate with the risks of each product and portfolio, including,
but not limited to, concentration of positions. The Commission is
merely clarifying that
[[Page 22259]]
concentrated positions are one of the risks that DCOs should be
incorporating in their initial margin requirements. The Commission does
not believe that DCOs, or their clearing members, would incur any
additional costs with this clarification.
In addition, Sec. 39.13(g)(3) requires that a DCO's systems for
generating initial margin requirements, including its theoretical
models, be reviewed and validated by a qualified and independent party
on a regular basis. The provision further provides that employees of
the DCO may conduct the validations as long as they are not responsible
for the development or operation of the systems and models being
tested. The Commission is proposing to amend Sec. 39.13(g)(3) to
specify that ``on a regular basis'' means annually and to also permit
employees of an affiliate of the DCO to conduct such independent
validations. The Commission believes these amendments would not impose
additional costs on DCOs insofar as DCOs were already interpreting
``regular'' to mean annual, but rather may reduce costs by permitting
the use of employees of a DCO's affiliate when conducting the
independent validations.
The Commission is proposing new Sec. 39.13(g)(7)(iii) to specify
that, in conducting back tests of initial margin requirements, a DCO
shall compare portfolio losses only to those components of initial
margin that capture changes in market risk factors. This change is
intended to reflect existing practices; therefore, any costs associated
with this change would be reduced for DCOs that already follow this
approach.
Regulation 39.13(g)(8)(i) requires a DCO to collect initial margin
on a gross basis for each clearing member's customer account(s). As
noted above, after the regulation was adopted, Division staff learned
of operational issues that DCOs would face if the provision applied to
intraday settlements as well as end-of-day settlements. As a result,
the Commission proposes to amend Sec. 39.13(g)(8)(i) to permit a DCO
to collect customer initial margin from its clearing members on a gross
basis only during its end-of-day settlement cycle. Because this change
is intended to reflect existing practice, any costs associated with
this change would be reduced for those DCOs that already follow this
approach.
Regulation 39.13(g)(8)(i)(B) provides that, for purposes of
calculating the gross initial margin requirement for clearing members'
customer accounts, a DCO may require its clearing members to report to
the DCO the gross positions of each individual customer or the sum of
the gross positions of its customers. The Commission is proposing
amendments to Sec. 39.13(g)(8)(i)(B) to require a DCO to have rules
requiring its clearing members to report customer information about
futures (as well as swaps) to DCOs. This will enable DCOs, in turn, to
report this information to the Commission under Sec.
39.19(c)(1)(i)(D), which, as proposed, would require DCOs to report the
positions themselves (i.e., the long and short positions) as well as
risk sensitivities and valuation data for end-of-day positions. The
Commission believes adopting and implementing such rules could impose
nominal cost on DCOs. In addition, clearing members may incur costs
associated with reporting this data to the extent they are not already
doing so.
The Commission is proposing to amend Sec. 39.13(g)(12) by
requiring DCOs to increase the frequency by which they evaluate the
appropriateness of haircuts that they apply to initial margin
collateral from a quarterly basis to a monthly basis. Because Sec.
39.11(d)(1) already requires that haircuts be evaluated on a monthly
basis for assets that are used to meet the DCO's financial resources
obligations set forth in Sec. 39.11(a), and those resources include
initial margin, the Commission does not believe this change will result
in any increase in costs.
In Sec. 39.13(h)(1)(i), the Commission is proposing to require
that, in determining a clearing member's risk limits under existing
Sec. 39.13(h)(1)(i), the factors that a DCO considers must include the
difficulty of liquidating the clearing member's positions. The
Commission believes that this change may impose minimal costs.
In Sec. 39.13(h)(5)(ii), the Commission is proposing to clarify
that a DCO should take appropriate actions to address concerns
identified in its review of the risk management policies of its
clearing members. The Commission believes that DCOs already do this as
part of their compliance with existing Sec. 39.13(h)(5)(ii).
In Sec. 39.13(i), the Commission is proposing to require a DCO to
provide certain information as part of a rule filing submitted for
Commission approval pursuant to Sec. 40.5 to facilitate the
Commission's review of a DCO's cross-margining program. This
information includes: Identification of the products that would be
eligible for cross-margining; analysis of the risk characteristics, the
liquidity of the respective markets, and availability of reliable
prices; financial and operational requirements that would apply to
clearing members participating in the program; a description and
analysis of the margin methodology that would be used to calculate
initial margin requirements; procedures the DCO would follow in the
event of a clearing member default; a description of the arrangements
for obtaining daily position data with respect to products in the
account; whether funds to support the cross-margined positions will be
maintained together in one account or in separate accounts at each
participating clearing organization; and a copy of the agreement
between the clearing organizations participating in the cross-margining
program. A DCO may incur costs to prepare and provide this information.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (D) of the CEA, the Commission believes that the
proposed amendments to Sec. 39.13 will aid in the protection of market
participants and the public by enhancing certain risk management
requirements of DCOs. For example, proposed Sec. 39.13(g)(12) would
require DCOs to increase the frequency by which they evaluate the
appropriateness of haircuts that they apply to initial margin
collateral. Given that initial margin is held for risk management
purposes, assessing haircuts more frequently would enhance a DCO's
ability to manage its risks. In addition, the proposed amendments to
Sec. 39.13 will help preserve the efficiency and financial integrity
of the derivatives markets by enhancing certain risk management
requirements of DCOs. For example, in consideration of section
15(a)(2)(B) of the CEA, the Commission believes the proposed amendments
to Sec. 39.13(h)(1)(i), which would specify that a DCO's risk limits
should address positions that may be difficult to liquidate, would help
to ensure that a DCO can properly manage its risks in the event of a
default, thereby promoting the financial integrity of the derivatives
markets. The Commission also believes that the amendments to Sec.
39.13 will strengthen and promote sound risk management practices
across DCOs, their clearing members, and clearing members' customers.
Specifically, the amendments enhance, clarify, and provide flexibility
in complying with several DCO risk management requirements, which will
aid DCOs in efficiently allocating their risk management attention and
resources. Finally, in consideration of
[[Page 22260]]
section 15(a)(2)(E) of the CEA, the Commission notes the public
interest in promoting and protecting public confidence in the safety
and security of the financial markets. DCOs are essential to risk
management in the financial markets, both systemically and on an
individual firm level. The proposed amendments, by enhancing,
clarifying, and providing flexibility beyond current requirements,
promote the ability of DCOs to perform these risk management functions.
The Commission has considered the other section 15(a) factors and
believes that they are not implicated by the proposed amendments.
11. Treatment of Funds--Sec. 39.15
a. Benefits
The Commission is proposing to amend Sec. 39.15(b)(1) to clarify
that ``funds and assets'' are equivalent to ``money, securities, and
property,'' which would better align the language of Sec. 39.15(b)(1)
with the language in the CEA. Furthermore, Sec. 39.15(b)(2)(ii)
requires a DCO to file a petition for an order pursuant to section
4d(a) of the CEA in order for the DCO and its clearing members to
commingle customer positions in futures, options, and swaps in a
futures customer account subject to section 4d(a) of the CEA The
Commission is proposing to amend Sec. 39.15(b)(2)(ii) to permit a DCO
to file rules for Commission approval pursuant to Sec. 40.5 in order
for the DCO and its clearing members to commingle such positions. This
would better align the requirements of Sec. 39.15(b)(2)(ii) with Sec.
39.15(b)(2)(i), which requires a DCO that wants to commingle futures,
options, and swaps in a cleared swaps customer account to file rules
for Commission approval. This approach would reduce the burden on DCOs
while providing the Commission with sufficient means to determine
whether the customer funds will be adequately protected.
Regulation 39.15(d) requires a DCO to have rules providing for the
prompt transfer of all or a portion of a customer's portfolio of
positions and related funds at the same time from the carrying clearing
member to another clearing member, without requiring the close-out and
re-booking of the positions prior to the requested transfer. Based on
feedback received from DCOs, the Commission is proposing to amend Sec.
39.15(d) to delete the words ``at the same time,'' thus requiring the
``prompt,'' but not necessarily simultaneous, transfer of a customer's
positions and related funds. The Commission is further amending the
provision to require the transfer of related funds ``as necessary,''
recognizing that the transfer of customer positions will not always
require the transfer of funds. These changes are meant to reflect
common practice and provide greater flexibility to DCOs in transferring
positions and funds. The Commission is also proposing to amend Sec.
39.15(e), which relates to permitted investments of customer funds, to
clarify that the regulation applies to any investment of customer funds
or assets, including cleared swaps customer collateral, as defined in
Sec. 22.1. At the time Sec. 39.15(e) was adopted, the Commission had
not yet adopted regulations concerning cleared swaps customer funds but
intended for Sec. 39.15(e) to also apply to those funds. This change
would ensure that cleared swaps customer collateral receives the same
safekeeping as other funds and assets invested by DCOs and would
reflect the Commission's intent.
b. Costs
The Commission believes proposed amendments to Sec.
39.15(b)(2)(ii) to permit a DCO to file rules for Commission approval
pursuant to Sec. 40.5 in order for the DCO and its clearing members to
commingle certain customer positions would streamline the procedures
for a request to commingle customer funds and would not increase costs
to DCOs. As discussed above, the proposal would potentially reduce
costs for DCOs that would otherwise have to petition the Commission for
an order providing relief from section 4d of the CEA in order to
commingle such customer funds. The Commission has not identified any
other costs associated with the proposed amendments to Sec. 39.15,
including costs to customers in this regard.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.15 will aid in the protection of market
participants and the public, specifically customers of clearing
members, by providing clarity on several requirements related to the
treatment of customer funds, including with respect to the transfer of
customer positions and funds under Sec. 39.15(d). Moreover, the
proposed amendments will promote efficiency in the derivatives markets
by streamlining the procedures for a request to commingle customer
funds, as DCOs would be permitted to file rules for Commission approval
whether requesting to commingle customer funds in a futures or cleared
swaps customer account. The Commission has considered the other section
15(a) factors and believes that they are not implicated by the proposed
amendments.
12. Default Rules and Procedures--Sec. 39.16
a. Benefits
The Commission is proposing to amend Sec. 39.16 to improve DCOs'
default management processes by, among other things: Requiring a DCO to
include its clearing members in an annual test of its default
management plan in proposed Sec. 39.16(b); requiring the DCO to
establish a default committee, which must include clearing members and
other participants, that would convene in the event of a default
involving substantial or complex positions to help identify any market
issues that the DCO is considering in proposed Sec. 39.16(c)(1); and
requiring a DCO's default management procedures to include immediately
posting a declaration of a default on the DCO's website in proposed
Sec. 39.16(c)(2)(ii). The proposed amendments are intended to ensure
that clearing members are prepared in the event of a default.
The Commission is also proposing to amend Sec. 39.16(c)(2)(iii)(C)
to require any allocation of a defaulting clearing member's positions
to be proportional to the size of the participating or accepting
clearing member's positions in the same product class at the DCO. This
proposed amendment would ensure that clearing members have the
flexibility, but not the requirement, to participate in auctions and
allocations beyond the proportional size of their respective positions
as measured by the initial margin requirement for those positions. This
ensures that clearing members cannot be forced to involuntarily absorb
positions of a defaulting member which incentivizes the DCO to
calibrate its risk management mechanisms in a manner to avoid a
scenario in which clearing members' participation in an auction or
allocation falls short of the size of the defaulting clearing member's
positions in that product class.
b. Costs
To comply with the proposal to require the participation of
clearing members in a test of a DCO's default management plan and in a
DCO's default committee, a DCO may incur costs to coordinate clearing
members' participation and to establish a default committee. However,
the Commission
[[Page 22261]]
believes that many DCOs already involve clearing members in their tests
as a matter of best practice. The Commission is not aware of a less
costly alternative that would provide clearing members with an
opportunity to participate in key aspects of a DCO's default
management.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.16(c)(2)(ii) to require that a DCO have default
procedures that include immediate public notice on the DCO's website of
a declaration of default will aid in the protection of market
participants and the public by ensuring more timely notice of a
default. In further consideration of section 15(a)(2)(A) of the CEA,
the Commission believes the proposed amendments to Sec.
39.16(c)(2)(iii)(C) regarding the allocation of a defaulting clearing
member's positions would protect clearing members from involuntarily
having to bid on or accept defaulting positions that are not in
proportion to the size of their positions in that product class, while
also providing clearing members with the flexibility to voluntarily bid
on or accept more than a proportional share of the defaulting positions
if that clearing member has the ability to manage the risk of those new
positions. In consideration of section 15(a)(2)(B) and (D) of the CEA,
the Commission believes the additional amendments to Sec. 39.16(b) and
(c)(1) support the financial integrity of the derivatives markets and
promote sound risk management practices by requiring DCOs to have
greater clearing member participation in their default management
processes and procedures. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
proposed amendments.
13. Rule Enforcement--Sec. 39.17
a. Benefits
Regulation 39.17(a) codifies Core Principle H, which requires a DCO
to maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance with its rules and dispute
resolution. The Commission is proposing a technical change to Sec.
39.17(a)(1) to emphasize that a DCO is required to monitor and enforce
compliance by both itself and its members with the DCO's rules. The
Commission is also proposing to amend Sec. 39.17(b), which permits a
DCO's board of directors to delegate its responsibility for compliance
with the requirements of Sec. 39.17(a) to the DCO's risk management
committee, to allow a DCO to delegate such responsibility to a
committee other than the risk management committee. This would allow
DCOs more discretion in delegating this function to the most
appropriate committee.
b. Costs
The Commission does not believe the proposed amendments to Sec.
39.17(a)(1) or (b) will impose any additional costs on DCOs or their
members because the changes are technical in nature.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(D) of the CEA, the Commission believes that the proposed
amendments to Sec. 39.17 will promote sound risk management practices
by emphasizing the importance of compliance with DCO rules and by
providing DCOs with additional flexibility in structuring their
governance arrangements. The Commission has considered the other
section 15(a) factors and believes that they are not implicated by the
proposed amendments.
14. Reporting--Sec. 39.19
a. Benefits
The Commission is proposing several amendments to Sec. 39.19 to
add new requirements, clarify certain existing requirements, and
incorporate other proposed amendments to part 39. The proposed
amendments to Sec. 39.19 would assist DCOs by codifying the bulk of
DCOs' ongoing reporting requirements in one section of part 39 and
providing additional detail with respect to certain requirements. In
some cases, the Commission is proposing to adopt additional reporting
requirements that would allow the Commission to conduct more effective
oversight of DCOs' compliance with the DCO Core Principles and
Commission regulations.
As part of the daily reporting requirements, the Commission is
proposing to amend Sec. 39.19(c)(1)(i)(A)-(C) to specify that a DCO is
required to report margin, cash flow, and position information by
individual customer account. The Commission believes the ability to
analyze positions at the customer level is a crucial element of an
effective risk surveillance program. The ability to identify those
customers whose positions create the most risk to a DCO's clearing
members would assist the Commission in determining whether adequate
measures are in place to address those risks and whether the Commission
needs to take proactive steps to see that those risks are mitigated,
thereby enhancing the protections afforded to the markets generally.
The Commission is also proposing to amend Sec. 39.19(c)(1)(i)(D) to
specify that, with respect to end-of-day position information, DCOs
must report the positions themselves (i.e., the long and short
positions) as well as risk sensitivities and valuation data for these
positions.\88\ This information will better inform staff of the
assumptions incorporated into the position information. The Commission
is also proposing to amend Sec. 39.19(c)(1)(i)(D) to have DCOs provide
any legal entity identifiers and internally-generated identifiers
within each customer origin for each clearing member, which would help
identify customers across clearing members and DCOs.
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\88\ The Commission estimates for PRA purposes that there would
be an increase in the burden incurred by DCOs, as discussed in
section IX.B.2.d above.
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The Commission is proposing to add certain event-specific reporting
requirements, including: A decrease in liquidity resources in proposed
Sec. 39.19(c)(4)(ii); a legal name change in proposed Sec.
39.19(c)(4)(xi); a change in any liquidity funding arrangement in
proposed Sec. 39.19(c)(4)(xiii); a change in settlement bank
arrangements in proposed Sec. 39.19(c)(4)(xiv); a change in a DCO's
arrangements with its depositories that hold customer funds in proposed
Sec. 39.19(c)(4)(xvi); a change in the DCO's fiscal year end in
proposed Sec. 39.19(c)(4)(xx); a change in the DCO's accounting firm
in proposed Sec. 39.19(c)(4)(xxi); major decisions of the DCO's board
in proposed Sec. 39.19(c)(4)(xxii); issues with a DCO's margin model
in proposed Sec. 39.19(c)(4)(xxiv) or settlement bank in proposed
Sec. 39.19(c)(4)(xv); and new futures or option products accepted for
clearing by the DCO in proposed Sec. 39.19(c)(4)(xxvi). The Commission
believes it is important for it to be aware of these changes due to
their potential impact on a DCO's operations.
b. Costs
The Commission expects a minimal cost burden with respect to the
proposed changes to the event-specific reporting requirements under
Sec. 39.19(c)(4), in part because the incidents that would trigger
such
[[Page 22262]]
reporting do not occur very often. Furthermore, where reporting is
required under Sec. 39.19(c)(4), a DCO is required to provide a brief
notice with only the pertinent details of the incident. Therefore, the
Commission believes any costs imposed by these changes would be
nominal.
With respect to daily reporting requirements, the Commission
understands that most DCOs already report the information that would be
required. Because staff guidance regarding the format and manner of
this reporting is periodically updated, the Commission understands that
there may be costs associated with making technical changes to
accommodate these updates. The Commission requests an estimate of any
such costs from DCOs that currently report this information.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (D) of the CEA, the Commission believes that the
proposed amendments to Sec. 39.19 will promote the protection of
market participants and the public and contribute to sound risk
management practices by providing the Commission with timely
information that is critical to its risk surveillance efforts. Also, in
consideration of section 15(a)(2)(D) of the CEA, the Commission
believes that requiring DCOs to provide notice to the Commission of
certain additional events under Sec. 39.19, such as a decrease in
liquidity resources, settlement bank issues, and margin model issues,
could further incentivize DCOs to avoid those risks, or to mitigate
them more effectively if they do occur. The Commission has considered
the other section 15(a) factors and believes that they are not
implicated by the proposed amendments.
15. Public Information--Sec. 39.21
a. Benefits
The Commission is proposing to amend the public reporting
requirements of Sec. 39.21 to require that DCOs make each of the items
of information listed in proposed Sec. 39.21(c) \89\ available
separately on the DCO's website instead of merely including them in the
DCO's rulebook. This would assist DCOs' current and prospective
clearing members and the general public in locating the relevant
information. Furthermore, Sec. 39.21(c)(4) requires a DCO to publicly
disclose the size and composition of its financial resource package
available in the event of a clearing member default. To address
questions concerning how often this information must be updated, the
Commission is proposing to amend Sec. 39.21(c)(4) to clarify that it
should be updated quarterly, consistent with Sec. 39.11(f)(1)(i)(A),
which requires a DCO to report this information to the Commission each
fiscal quarter. The proposed change would assist DCOs in complying with
this requirement, while ensuring consistent and timely disclosure to
the public.
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\89\ Regulation 39.21(c) requires a DCO to disclose publicly and
to the Commission information concerning: (1) The terms and
conditions of each contract, agreement, and transaction cleared and
settled by the DCO; (2) each clearing and other fee that the DCO
charges its clearing members; (3) the margin-setting methodology;
(4) the size and composition of the financial resource package
available in the event of a clearing member default; (5) daily
settlement prices, volume, and open interest for each contract,
agreement, or transaction cleared or settled by the DCO; (6) the
DCO's rules and procedures for defaults in accordance with Sec.
39.16; and (7) any other matter that is relevant to participation in
the clearing and settlement activities of the DCO.
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b. Costs
Because the proposed amendments to Sec. 39.21 merely require a DCO
to separately make public information that would otherwise be made
public in its rulebook, the Commission anticipates any additional costs
to DCOs would be minimal.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A), (B), and (D) of the CEA, the Commission believes that the
proposed amendments to Sec. 39.21 would enhance existing protection of
market participants and the public; promote the efficiency and
financial integrity of the derivatives markets; and aid in sound risk
management practices by ensuring that key public information about the
DCO's operations is readily accessible, complete, and current. The
Commission has considered the other section 15(a) factors and believes
that they are not implicated by the proposed amendments.
16. Governance Fitness Standards, Conflicts of Interest, and
Composition of Governing Boards--Sec. Sec. 39.24, 39.25, and 39.26
a. Benefits
The Commission is proposing to remove Sec. 39.32, which sets forth
requirements for governance arrangements for SIDCOs and subpart C DCOs,
and adopt new Sec. Sec. 39.24, 39.25, and 39.26, which would
incorporate all of the requirements of Sec. 39.32. All DCOs, including
SIDCOs and subpart C DCOs, would be subject to the same governance
fitness standards, conflict of interest requirements, and board
composition requirements, which most DCOs already meet in order to be
considered a QCCP. This would give DCOs clear direction on how to
comply with Core Principles O, P, and Q,\90\ the only DCO Core
Principles for which the Commission has yet to adopt implementing
regulations. Further, consistent with Core Principle Q, proposed Sec.
39.26 would require that a DCO's governing board or committee includes
market participants. Because the Commission has become aware of issues
in interpreting this requirement, the Commission proposes to define
``market participant,'' as well as specify that market participation is
required on the DCO's governing board or governing committee, i.e., the
group with the ultimate decision-making authority. This would avoid
ambiguity and provide DCOs with greater clarity.
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\90\ Core Principles O, P, and Q respectively address governance
arrangements, conflicts of interest, and composition of governing
boards.
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b. Costs
DCOs may incur costs to comply with the proposed requirements in
Sec. Sec. 39.24, 39.25, and 39.26.\91\ Some DCOs must already comply
with these standards and will not face incremental costs. The language
that is proposed to be adopted in Sec. Sec. 39.24, 39.25, and 39.26 is
essentially the same as that which is included in Sec. 39.32.
Regulation 39.32 is applicable to SIDCOs and subpart C DCOs and
implements guidance from the PFMIs with which a CCP must comply in
order to be considered a QCCP. Non-U.S. DCOs that are neither SIDCOs
nor subpart C DCOs are generally held to these requirements by their
home country regulators for the same reason. The Commission believes
these standards are appropriate for all DCOs and incorporate best
practices within the clearing industry.
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\91\ The Commission estimates for PRA purposes that there would
be an increase in the burden incurred by DCOs, as discussed in
section IX.B.2.g above.
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c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. Although the Commission
believes that most, if not all, DCOs already comply with these
[[Page 22263]]
requirements, to the extent they do not, the Commission believes the
adoption of Sec. Sec. 39.24, 39.25, and 39.26 would improve DCO risk
management practices by promoting transparency of governance
arrangements and making sure that the interests of a DCO's clearing
members and, where relevant, their customers are taken into account.
This would further enhance the protection of market participants and
the public and the financial integrity of the derivatives markets.
17. Legal Risk--Sec. 39.27
The Commission is proposing to amend Sec. 39.27(c) to require a
DCO that provides clearing services outside the United States to ensure
that the memorandum required in Exhibit R of Form DCO remains accurate
and up-to-date. This would ensure that the DCO remains aware of any
potential choice of law issues that may impact the enforceability of
the DCO's rules, procedures, and contracts in all relevant
jurisdictions. The Commission believes this requirement would not
impose additional costs on DCOs that already maintain compliance with
Sec. 39.27(c), as DCOs with prudent risk management practices should
continuously assess their rules, procedures, and policies against the
laws and regulations of the jurisdictions in which they operate. For
the same reason, the Commission does not anticipate that this
requirement will have a direct impact on any of the section 15(a)
factors.
18. Fully-Collateralized Positions--Sec. Sec. 39.2, 39.11, 39.12,
39.13, and 39.19
a. Benefits
As discussed above, fully-collateralized positions do not expose
DCOs to many of the risks that traditionally margined products do. Full
collateralization prevents a DCO from being exposed to credit risk
stemming from the inability of a clearing member or customer of a
clearing member to meet a margin call or a call for additional capital.
This limited exposure and full collateralization of that exposure
renders certain provisions of part 39 inapplicable or unnecessary. As a
result, the Division has granted relief from certain provisions of part
39 to DCOs that clear fully-collateralized positions. The Commission is
proposing to codify this relief in order to provide greater clarity to
DCOs and future applicants for DCO registration regarding how the
regulations in part 39 apply to DCOs that clear fully-collateralized
positions. DCOs that clear fully-collateralized positions would no
longer need to request relief from certain part 39 requirements nor
attempt to comply with those requirements, thereby conserving such
DCOs' time and resources.
b. Costs
The Commission does not anticipate any costs associated with these
amendments, as the proposed rules remove requirements that need not
apply to fully-collateralized positions.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(B) of the CEA, the Commission believes that the proposal to
codify relief that the Commission has granted to DCOs that clear fully-
collateralized positions from requirements that do not apply to these
positions, may increase operational efficiency for such DCOs. The
proposed amendments should not impact the protection of market
participants and the public, the financial integrity of markets, or
sound risk management practices, as the requirements that the
Commission is proposing to exclude for fully-collateralized positions
do not further these factors when applied to such positions. The
Commission has considered the other section 15(a) factors and believes
that they are not implicated by the proposed amendments.
19. Provisions Applicable to SIDCOs and DCOs That Elect To Be Subject
to the Provisions--Sec. Sec. 39.33, 39.36, 39.37, and Subpart C
Election Form
a. Benefits
Regulation 39.33(a)(1) requires a SIDCO or a subpart C DCO that is
systemically important in multiple jurisdictions, or that is involved
in activities with a more complex risk profile, to maintain financial
resources sufficient to enable it to meet its financial obligations to
its clearing members notwithstanding a default by the two clearing
members creating the largest combined loss in extreme but plausible
market conditions. The Commission is proposing to amend Sec.
39.33(a)(1) by replacing the phrase ``largest combined loss'' with
``largest combined financial exposure'' in order to be consistent with
Core Principle B and Sec. 39.11(a)(1) regarding DCO financial
resources requirements. The Commission is also proposing to amend Sec.
39.33(c)(1) to clarify that the ``largest aggregate liquidity
obligation'' means the total amount of cash, in each relevant currency,
that the defaulted clearing member would be required to pay to the DCO.
Proposed Sec. 39.33(c)(1) would reduce currency risk for SIDCOs and
subpart C DCOs by ensuring that these DCOs have sufficient liquidity in
the relevant currency of corresponding obligations during the time it
would take to liquidate or auction a defaulted clearing member's
positions. The Commission is also proposing to amend Sec. 39.33(d) to
require that a SIDCO use available Federal Reserve Bank accounts and
services where practical. This requirement would further enhance a
SIDCO's financial integrity and management of liquidity risk, thereby
promoting the financial integrity of the derivatives markets, while
permitting SIDCOs to consider lower cost alternatives where
appropriate.
Furthermore, the Commission is proposing to amend Sec.
39.36(b)(2)(ii) to replace the words ``produce accurate results'' with
``react appropriately'' to better reflect that the purpose of a
sensitivity analysis is to assess whether the margin model will react
appropriately to changes of inputs, parameters, and assumptions,
thereby enhancing the overall margin coverage. The Commission is also
proposing to amend Sec. 39.36(d), which requires each SIDCO and
subpart C DCO to ``regularly'' conduct an assessment of the theoretical
and empirical properties of its margin model for all products it
clears, to clarify that the assessment should be conducted on at least
an annual basis or more frequently if there are material relevant
market developments. This would ensure that SIDCOs and subpart C DCOs
continue to test their margin model with sufficient frequency.
Under Sec. 39.37, a SIDCO or a subpart C DCO is required to
publicly disclose its responses to the CPMI-IOSCO Disclosure Framework
\92\ and, in order to ensure the continued accuracy and usefulness of
its responses, to review and update them at least every two years and
following material changes to the SIDCO's or subpart C DCO's system or
environment in which it operates. The Commission is proposing to amend
Sec. 39.37(b) to additionally require that a SIDCO or a subpart C DCO
notify the Commission no later than ten business days after any updates
to its responses to the CPMI-IOSCO Disclosure Framework to reflect
material changes to the DCO's system or environment. The notice would
need to identify changes made since the latest version of
[[Page 22264]]
the responses. The Commission is also proposing to amend Sec. 39.37(c)
to explicitly state that a SIDCO or a subpart C DCO must disclose
relevant basic data on transaction volume and values that are
consistent with the standards set forth in the CPMI-IOSCO Public
Quantitative Disclosure Standards for Central Counterparties. These
proposed amendments would be consistent with SIDCOs' and subpart C
DCOs' existing CPMI-IOSCO obligations.
---------------------------------------------------------------------------
\92\ See CMPI-IOSCO, Principles for Financial Market
Infrastructures: Disclosure Framework and Assessment Methodology
(Dec. 2012), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD396.pdf.
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The Commission is proposing to amend the subpart C Election Form to
better reflect the requirements in subpart C of part 39 and to more
closely align the format of the subpart C Election Form with Form DCO
by specifying the information and/or documentation that must be
provided by a DCO as part of its petition for subpart C election.
Currently, unlike Form DCO, the subpart C Election Form references the
corresponding regulations in subpart C but does not specify the type or
level of information that must be filed as an exhibit. The proposed
amendments are intended to provide greater transparency and clarity as
to the type of information required.
b. Costs
Because most of the proposed changes to subpart C of part 39 are
meant to clarify existing requirements, the Commission does not expect
that SIDCOs and subpart C DCOs would incur additional costs. Where
reporting is required under proposed Sec. 39.37(b), the Commission
believes any cost associated with such notice would be nominal for
SIDCOs and subpart C DCOs, as they would already be required to
periodically update the information publicly.
c. Section 15(a) Factors
In addition to the discussion above, the Commission has evaluated
the costs and benefits in light of the specific considerations
identified in section 15(a) of the CEA. In consideration of section
15(a)(2)(A) and (B) of the CEA, respectively, the Commission believes
that the proposed amendments would protect market participants and the
public, and promote the financial integrity of SIDCOs and the
derivatives markets by, for example, clarifying SIDCO financial
resources requirements, requiring the use of central bank accounts,
where practical, and ensuring that SIDCOs continue to test their margin
models with sufficient frequency. Moreover, in consideration of section
15(a)(2)(D) of the CEA, the Commission believes the proposed amendments
to Sec. 39.33(c)(1) would promote sound risk management policies by
reducing currency risk for SIDCOs and subpart C DCOs by ensuring that
these DCOs have sufficient liquidity in the relevant currency of
corresponding obligations during the time it would take to liquidate or
auction a defaulted clearing member's positions. The Commission has
considered the other section 15(a) factors and believes that they are
not implicated by the proposed amendments.
20. Part 140--Organization, Functions, and Procedures of the Commission
a. Benefits
The Commission is proposing to amend Sec. 140.94 to provide the
Director of the Division with delegated authority to review DCO
registration applications, determine whether an application is
materially complete, request additional information in support of an
application, stay the running of the 180-day review period for an
application, and request additional information in support of a rule
submission. The Commission believes that DCOs would benefit from the
proposed delegation of authority, as it would promote a more efficient
process to address these aspects of registration and rule
certification.
b. Costs
The Commission has not identified any costs on DCOs or their
members associated with the proposed amendments to Sec. 140.94.
c. Section 15(a) Factors
The Commission has considered the section 15(a) factors and
believes that they are not implicated by this proposed amendment.
D. Antitrust Considerations
Section 15(b) of the CEA requires the Commission to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any Commission
rule or regulation.\93\
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\93\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------
The Commission believes that the public interest to be protected by
the antitrust laws is generally the promotion of competition. The
Commission requests comment on whether the proposed rulemaking
implicates any other specific public interest to be protected by the
antitrust laws. The Commission has considered the proposed rulemaking
to determine whether it is anticompetitive and has identified no
anticompetitive effects. The Commission requests comment on whether the
proposed rulemaking is anticompetitive and, if it is, what the
anticompetitive effects are.
Because the Commission has determined that the proposed rules are
not anticompetitive and have no anticompetitive effects, the Commission
has not identified any less anticompetitive means of achieving the
purposes of the CEA. The Commission requests comment on whether there
are less anticompetitive means of achieving the relevant purposes of
the CEA that would otherwise be served by adopting the proposed rules.
List of Subjects
17 CFR Part 1
Brokers, Commodity futures, Consumer protection, Definitions,
Reporting and recordkeeping requirements, Swaps.
17 CFR Part 39
Application form, Business and industry, Commodity futures,
Consumer protection, Default rules and procedures, Definitions,
Enforcement authority, Participant and product eligibility, Reporting
and recordkeeping requirements, Risk management, Settlement procedures,
Swaps, Treatment of funds.
17 CFR Part 140
Authority delegations (Government agencies), Conflict of interests,
Organization and functions (Government agencies).
For the reasons stated in the preamble, the Commodity Futures
Trading Commission proposes to amend 17 CFR chapter I as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
0
1. The authority citation for part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 6h,
6i, 6k, 6l, 6m, 6n, 6o, 6p, 6r, 6s, 7, 7a-1, 7a-2, 7b, 7b-3, 8, 9,
10a, 12, 12a, 12c, 13a, 13a-1, 16, 16a, 19, 21, 23, and 24 (2012).
0
2. In Sec. 1.20, revise paragraphs (d)(1), (7), and (8) introductory
text to read as follows:
Sec. 1.20 Futures customer funds to be segregated and separately
accounted for.
* * * * *
(d) * * *
(1) A futures commission merchant must obtain a written
acknowledgment from each bank, trust company, derivatives clearing
organization, or
[[Page 22265]]
futures commission merchant prior to or contemporaneously with the
opening of an account by the futures commission merchant with such
depositories; provided, however, that a written acknowledgment need not
be obtained from a derivatives clearing organization that has adopted
and submitted to the Commission rules that provide for the segregation
of futures customer funds in accordance with all relevant provisions of
the Act and the rules in this chapter, and orders promulgated
thereunder, and in such cases, the requirements set forth in paragraphs
(d)(3) through (6) of this section shall not apply to the futures
commission merchant.
* * * * *
(7) Where a written acknowledgment is required, the futures
commission merchant shall promptly file a copy of the written
acknowledgment with the Commission in the format and manner specified
by the Commission no later than three business days after the opening
of the account or the execution of a new written acknowledgment for an
existing account, as applicable.
(8) Where a written acknowledgment is required, a futures
commission merchant shall obtain a new written acknowledgment within
120 days of any changes in the following:
* * * * *
0
3. In Sec. 1.59, revise paragraph (a)(1) to read as follows:
Sec. 1.59 Activities of self-regulatory organization employees,
governing board members, committee members, and consultants.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3.
* * * * *
0
4. In Sec. 1.63, revise paragraph (a)(1) to read as follows:
Sec. 1.63 Service on self-regulatory organization governing boards or
committees by persons with disciplinary histories.
(a) * * *
(1) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3, except as defined in paragraph
(b)(6) of this section.
* * * * *
0
5. In Sec. 1.64, revise paragraph (a)(1) to read as follows:
Sec. 1.64 Composition of various self-regulatory organization
governing boards and major disciplinary committees.
(a) * * *
(1) Self-regulatory organization means ``self-regulatory
organization,'' as defined in Sec. 1.3.
* * * * *
0
6. In Sec. 1.69, revise paragraph (a)(7) to read as follows:
Sec. 1.69 Voting by interested members of self-regulatory
organization governing boards and various committees.
(a) * * *
(7) Self-regulatory organization means a ``self-regulatory
organization,'' as defined in Sec. 1.3, but excludes registered
futures associations for the purposes of paragraph (b)(2) of this
section.
* * * * *
PART 39--DERIVATIVES CLEARING ORGANIZATIONS
0
7. The authority citation for part 39 continues to read as follows:
Authority: 7 U.S.C. 2, 7a-1, and 12a; 12 U.S.C. 5464; 15 U.S.C.
8325.
0
8. Revise Sec. 39.2 to read as follows:
Sec. 39.2 Definitions.
For the purposes of this part:
Activity with a more complex risk profile includes:
(1) Clearing credit default swaps, credit default futures, or
derivatives that reference either credit default swaps or credit
default futures and
(2) Any other activity designated as such by the Commission
pursuant to Sec. 39.33(a)(3).
Back test means a test that compares a derivatives clearing
organization's initial margin requirements with historical price
changes to determine the extent of actual margin coverage.
Business day means the intraday period of time starting at the
business hour of 8:15 a.m. and ending at the business hour of 4:45
p.m., on all days except Saturdays, Sundays, Federal holidays
established under 5 U.S.C. 6103, and foreign holidays. For purposes of
this provision, a foreign holiday is a day on which a derivatives
clearing organization and its domestic financial markets are closed for
a holiday that is not a Federal holiday in the United States.
Customer account or customer origin means ``customer account'' as
defined in Sec. 1.3 of this chapter.
Depository institution has the meaning set forth in section
19(b)(1)(A) of the Federal Reserve Act (12 U.S.C. 461(b)(1)(A)).
Enterprise risk management means an enterprise-wide strategic
business process intended to identify potential events that may affect
the enterprise and to manage the probability or impact of those events
on the enterprise as a whole, such that the overall risk remains within
the enterprise's risk appetite and provides reasonable assurance that
the derivatives clearing organization can continue to achieve its
objectives.
Fully-collateralized position means a contract cleared by a
derivatives clearing organization that requires the derivatives
clearing organization to hold, at all times, funds in the form of the
required payment sufficient to cover the maximum possible loss that a
counterparty could incur upon liquidation or expiration of the
contract.
House account or house origin means a clearing member account which
is not subject to section 4d(a) or 4d(f) of the Act.
Key personnel means derivatives clearing organization personnel who
play a significant role in the operations of the derivatives clearing
organization, the provision of clearing and settlement services, risk
management, or oversight of compliance with the Act and Commission
regulations in this chapter, and orders promulgated thereunder. Key
personnel include, but are not limited to, those persons who are or
perform the functions of any of the following: Chief executive officer;
president; chief compliance officer; chief operating officer; chief
risk officer; chief financial officer; chief technology officer; chief
information security officer; and emergency contacts or persons who are
responsible for business continuity or disaster recovery planning or
program execution.
Stress test means a test that compares the impact of potential
extreme price moves, changes in option volatility, and/or changes in
other inputs that affect the value of a position, to the financial
resources of a derivatives clearing organization, clearing member, or
large trader, to determine the adequacy of the financial resources of
such entities.
Subpart C derivatives clearing organization means any derivatives
clearing organization, as defined in section 1a(15) of the Act and
Sec. 1.3 of this chapter, which:
(1) Is registered as a derivatives clearing organization under
section 5b of the Act;
(2) Is not a systemically important derivatives clearing
organization; and
(3) Has become subject to the provisions of subpart C of this part,
pursuant to Sec. 39.31.
Systemically important derivatives clearing organization means a
financial market utility that is a derivatives clearing organization
registered under section 5b of the Act, which is currently designated
by the Financial Stability Oversight Council to be systemically
important and for which the Commission acts as the Supervisory Agency
pursuant to 12 U.S.C. 5462(8).
[[Page 22266]]
Trust company means a trust company that is a member of the Federal
Reserve System, under section 1 of the Federal Reserve Act (12 U.S.C.
221), but that does not meet the definition of depository institution
as set out in this section.
U.S. branch or agency of a foreign banking organization means the
U.S. branch or agency of a foreign banking organization as defined in
section 1(b) of the International Banking Act of 1978 (12 U.S.C. 3101).
0
9. Revise Sec. 39.3 to read as follows:
Sec. 39.3 Procedures for registration.
(a) Application for registration--(1) General procedure. An entity
seeking to register as a derivatives clearing organization shall file
an application for registration with the Secretary of the Commission in
the format and manner specified by the Commission. The Commission will
review the application for registration as a derivatives clearing
organization pursuant to the 180-day timeframe and procedures specified
in section 6(a) of the Act, and may approve or deny the application. If
the Commission approves the application, the Commission will register
the applicant as a derivatives clearing organization subject to
conditions as appropriate.
(2) Application. Any entity seeking to register as a derivatives
clearing organization shall submit to the Commission a completed Form
DCO, which shall include a cover sheet, all applicable exhibits, and
any supplemental materials, as provided in appendix A to this part
(application). The Commission will not commence processing an
application unless the applicant has filed the application as required
by this section. Failure to file a completed application will preclude
the Commission from determining that an application is materially
complete, as provided in section 6(a) of the Act. Upon its own
initiative, an applicant may file with its completed application
additional information that may be necessary or helpful to the
Commission in processing the application.
(3) Submission of supplemental information. The filing of a
completed application is a minimum requirement and does not create a
presumption that the application is materially complete or that
supplemental information will not be required. At any time during the
application review process, the Commission may request that the
applicant provide supplemental information in order for the Commission
to process the application. The applicant shall provide supplemental
information in the format and manner specified by the Commission.
(4) Application amendments. An applicant shall promptly amend its
application if it discovers a material omission or error, or if there
is a material change in the information provided to the Commission in
the application or other information provided in connection with the
application. An applicant is only required to submit exhibits and other
information that are relevant to the application amendment when filing
a Form DCO for the purpose of amending its pending application.
(5) Public information. The following sections of all applications
to become a registered derivatives clearing organization will be
public: First page of the Form DCO cover sheet (up to and including the
General Information section), Exhibit A-1 (regulatory compliance
chart), Exhibit A-2 (proposed rulebook), Exhibit A-3 (narrative summary
of proposed clearing activities), Exhibit A-7 (documents setting forth
the applicant's corporate organizational structure), Exhibit A-8
(documents establishing the applicant's legal status and certificate(s)
of good standing or its equivalent), and any other part of the
application not covered by a request for confidential treatment,
subject to Sec. 145.9 of this chapter.
(6) Extension of time for review. The Commission may further extend
the review period in paragraph (a)(1) of this section for any period of
time to which the applicant agrees in writing.
(b) Stay of application review--(1) By the Commission. The
Commission may stay the running of the 180-day review period if an
application is materially incomplete, in accordance with section 6(a)
of the Act.
(2) Delegation of authority. (i) The Commission hereby delegates,
until it orders otherwise, to the Director of the Division of Clearing
and Risk or the Director's designee, with the concurrence of the
General Counsel or the General Counsel's designee, the authority to
notify an applicant seeking registration as a derivatives clearing
organization that the application is materially incomplete and the
running of the 180-day period under section 6(a) of the Act is stayed.
(ii) The Director of the Division of Clearing and Risk may submit
to the Commission for its consideration any matter which has been
delegated in this paragraph (b)(2).
(iii) Nothing in this paragraph (b)(2) prohibits the Commission, at
its election, from exercising the authority delegated in paragraph
(b)(2)(i) of this section.
(c) Withdrawal of application for registration. An applicant for
registration may withdraw its application submitted pursuant to
paragraph (a) of this section by filing such a request with the
Secretary of the Commission in the format and manner specified by the
Commission. Withdrawal of an application for registration shall not
affect any action taken or to be taken by the Commission based upon
actions, activities, or events occurring during the time that the
application for registration was pending with the Commission.
(d) Amendment of an order of registration. (1) A derivatives
clearing organization requesting an amendment to an order of
registration shall file the request with the Secretary of the
Commission in the form and manner specified by the Commission.
(2) A derivatives clearing organization shall provide to the
Commission, upon the Commission's request, any additional information
and documentation necessary to review a request to amend an order of
registration.
(3) The Commission shall issue an amended order of registration
upon a Commission determination, in its own discretion, that the
derivatives clearing organization would maintain compliance with the
Act and the Commission's regulations in this chapter upon amendment to
the order. If deemed appropriate, the Commission may issue an amended
order of registration subject to conditions.
(4) The Commission may decline to issue an amended order based upon
a Commission determination, in its own discretion, that the derivatives
clearing organization would not continue to maintain compliance with
the Act and the Commission's regulations in this chapter upon amendment
to the order.
(e) Reinstatement of dormant registration. Before accepting
products for clearing, a dormant derivatives clearing organization as
defined in Sec. 40.1 of this chapter must reinstate its registration
under the procedures of paragraph (a) of this section; provided,
however, that an application for reinstatement may rely upon previously
submitted materials that still pertain to, and accurately describe,
current conditions.
(f) Vacation of registration--(1) Request. A registered derivatives
clearing organization may have its registration vacated pursuant to
section 7 of the Act by submitting a request to the Secretary of the
Commission in the format and manner specified by the Commission. A
vacation of registration shall not affect any action taken or to be
[[Page 22267]]
taken by the Commission based upon actions, activities or events
occurring during the time that the derivatives clearing organization
was registered with the Commission. The request shall include:
(i) The date that the vacation should take effect, which must be at
least ninety days after the request was submitted;
(ii) A description of how the derivatives clearing organization
intends to transfer or otherwise unwind all open positions at the
derivatives clearing organization and how such actions reflect the
interests of affected clearing members and their customers;
(iii) A statement that the derivatives clearing organization will
continue to maintain its books and records for the requisite statutory
and regulatory retention periods after its registration has been
vacated; and
(iv) A statement that the derivatives clearing organization will
continue to make its books and records available for inspection by any
representative of the Commission or the United States Department of
Justice after its registration has been vacated, as required by Sec.
1.31 of this chapter.
(2) Notice to registered entities. The Commission shall fulfill its
obligation to send a copy of the request and the order of vacation to
all other registered entities by posting the documents on the
Commission website.
(g) Request for transfer of open interest--(1) Submission. A
derivatives clearing organization seeking to transfer its positions
comprising open interest for clearing and settlement to another
derivatives clearing organization shall submit rules for Commission
approval pursuant to Sec. 40.5 of this chapter.
(2) Required information. The rule submission shall include, at a
minimum, the following:
(i) The underlying agreement that governs the transfer;
(ii) A description of the transfer, including the reason for the
transfer and the impact of the transfer on the rights and obligations
of clearing members and market participants holding the positions that
comprise the derivatives clearing organization's open interest;
(iii) A discussion of the transferee's ability to comply with the
Act, including the core principles applicable to derivatives clearing
organizations, and the Commission's regulations in this chapter;
(iv) The transferee's rules marked to show changes that would
result from acceptance of the transferred positions;
(v) A list of products for which the derivatives clearing
organization requests transfer of open interest; and
(vi) A representation by the transferee that it is in and will
maintain compliance with the Act, including the core principles
applicable to derivatives clearing organizations, and the Commission's
regulations in this chapter upon the transfer of the open interest.
(3) Commission action. The Commission may request additional
information in support of a rule submission filed under paragraph
(g)(1) of this section, and may grant approval of the rules in
accordance with Sec. 40.5 of this chapter.
0
10. In Sec. 39.4, revise paragraphs (a) and (e) to read as follows:
Sec. 39.4 Procedures for implementing derivatives clearing
organization rules and clearing new products.
(a) Request for approval of rules. A registered derivatives
clearing organization may request, pursuant to the procedures of Sec.
40.5 of this chapter, that the Commission approve any or all of its
rules and subsequent amendments thereto, including operational rules,
prior to their implementation or, notwithstanding the provisions of
section 5c(c)(2) of the Act, at any time thereafter, under the
procedures of Sec. 40.5 of this chapter. A derivatives clearing
organization may label as ``approved by the Commission'' only those
rules that have been so approved.
* * * * *
(e) Holding securities in a futures portfolio margining account. A
derivatives clearing organization seeking to provide a portfolio
margining program under which securities would be held in a futures
account as defined in Sec. 1.3 of this chapter, shall submit rules to
implement such portfolio margining program for Commission approval in
accordance with Sec. 40.5 of this chapter. Concurrent with the
submission of such rules for Commission approval, the derivatives
clearing organization shall petition the Commission for an order under
section 4d(a) of the Act.
0
11. In Sec. 39.10, revise paragraphs (c)(1), (3) and (4) and add
paragraph (d) to read as follows:
Sec. 39.10 Compliance with core principles.
* * * * *
(c) * * *
(1) Designation. Each derivatives clearing organization shall
establish the position of chief compliance officer, designate an
individual to serve as the chief compliance officer, and provide the
chief compliance officer with full responsibility and authority to
develop and enforce, in consultation with the board of directors or the
senior officer, appropriate compliance policies and procedures, to
fulfill the duties set forth in the Act and Commission regulations in
this chapter.
(i) The individual designated to serve as chief compliance officer
shall have the background and skills appropriate for fulfilling the
responsibilities of the position. No individual who would be
disqualified from registration under sections 8a(2) or 8a(3) of the Act
may serve as the chief compliance officer.
(ii) The chief compliance officer shall report to the board of
directors or the senior officer of the derivatives clearing
organization or, if the derivatives clearing organization engages in
substantial activities not related to clearing, the senior officer
responsible for the derivatives clearing organization's clearing
activities. The board of directors or the senior officer shall approve
the compensation of the chief compliance officer.
(iii) The chief compliance officer shall meet with the board of
directors or the senior officer at least once a year.
(iv) A change in the designation of the individual serving as the
chief compliance officer of the derivatives clearing organization shall
be reported to the Commission in accordance with the requirements of
Sec. 39.19(c)(4)(x).
* * * * *
(3) Annual report. The chief compliance officer shall, not less
than annually, prepare and sign a written report that covers the most
recently completed fiscal year of the derivatives clearing
organization. The annual report shall, at a minimum:
(i) Contain a description of the derivatives clearing
organization's written policies and procedures, including the code of
ethics and conflict of interest policies; provided that, to the extent
that the derivatives clearing organization's written policies and
procedures have not materially changed since they were most recently
described in an annual report to the Commission, and if the annual
report containing the most recent description was submitted within the
last five years, the annual report may instead incorporate by reference
the relevant descriptions from the most recent annual report containing
the description;
(ii) Review each core principle and applicable Commission
regulation in this chapter including, in the case of systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations, regulations in subpart C of this part, and with
respect to each:
(A) Identify, by name, rule number, or other identifier, the
compliance policies
[[Page 22268]]
and procedures that are designed to ensure compliance with each core
principle and applicable regulation in this chapter;
(B) Provide an assessment as to the effectiveness of these policies
and procedures;
(C) Discuss areas for improvement, and recommend potential or
prospective changes or improvements to the derivatives clearing
organization's compliance program and resources allocated to
compliance;
(iii) List any material changes to compliance policies and
procedures since the last annual report;
(iv) Describe the financial, managerial, and operational resources
set aside for compliance with the Act and Commission regulations in
this chapter; and
(v) Describe any material compliance matters, including incidents
of noncompliance, since the date of the last annual report, and
describe the corresponding action taken.
(4) Submission of annual report to the Commission. (i) Prior to
submitting the annual report to the Commission, the chief compliance
officer shall provide the annual report to the board of directors or
the senior officer of the derivatives clearing organization or, if the
derivatives clearing organization engages in substantial activities not
related to clearing, the senior officer responsible for the derivatives
clearing organization's clearing activities, for review. Submission of
the report to the board of directors or the senior officer shall be
recorded in the board minutes or otherwise, as evidence of compliance
with the requirement in this paragraph (c)(4)(i). The annual report
shall describe the process by which it was submitted to the board of
directors or the senior officer, including the date of submission.
(ii) The annual report shall be submitted to the Secretary of the
Commission in the format and manner specified by the Commission not
more than 90 days after the end of the derivatives clearing
organization's fiscal year. The report shall include a certification by
the chief compliance officer that, to the best of his or her knowledge
and reasonable belief, and under penalty of law, the annual report is
accurate and complete.
(iii) The derivatives clearing organization shall promptly submit
an amended annual report if material errors or omissions in the report
are identified after submission. An amendment must contain the
certification required under paragraph(c)(4)(ii) of this section.
(iv) A derivatives clearing organization may request from the
Commission an extension of time to submit its annual report in
accordance with Sec. 39.19(c)(3).
* * * * *
(d) Enterprise risk management--(1) General. A derivatives clearing
organization shall have an enterprise risk management program that
identifies and assesses sources of risk and their potential impact on
the operations and services of the derivatives clearing organization.
The derivatives clearing organization shall measure, monitor, and
manage identified sources of risk on an ongoing basis, including
through the development and use of appropriate information systems. The
derivatives clearing organization shall test the effectiveness of any
mitigating controls employed to reduce identified sources of risk to
ensure that the risks are properly mitigated.
(2) Enterprise risk management framework. A derivatives clearing
organization shall establish and maintain written policies and
procedures, approved by its board of directors or a committee of the
board of directors that establish an appropriate enterprise risk
management framework. The framework shall be reviewed at least annually
by the board of directors or committee of the board of directors and
updated as necessary.
(3) Standards for enterprise risk management framework. A
derivatives clearing organization shall follow generally accepted
standards and industry best practices in the development and review of
its enterprise risk management framework, assessment of the performance
of its enterprise risk management program, and management and
mitigation of risk to the derivatives clearing organization.
(4) Enterprise risk officer. A derivatives clearing organization
shall identify as its enterprise risk officer an appropriate individual
that exercises the full responsibility and authority to manage the
enterprise risk management program of the derivatives clearing
organization. The enterprise risk officer shall have the authority,
independence, resources, expertise, and access to relevant information
necessary to fulfil the responsibilities of the position consistent
with the requirements of this section.
0
12. Revise Sec. 39.11 to read as follows:
Sec. 39.11 Financial resources.
(a) General. A derivatives clearing organization shall have
adequate financial, operational, and managerial resources, as
determined by the Commission, to discharge each responsibility of the
derivatives clearing organization. A derivatives clearing organization
shall maintain sufficient financial resources to cover its exposures
with a high degree of confidence. At a minimum, each derivatives
clearing organization shall possess financial resources that exceed the
total amount that would:
(1) Enable the derivatives clearing organization to meet its
financial obligations to its clearing members notwithstanding a default
by the clearing member creating the largest financial exposure for the
derivatives clearing organization in extreme but plausible market
conditions; Provided that if a clearing member controls another
clearing member or is under common control with another clearing
member, the affiliated clearing members shall be deemed to be a single
clearing member for purposes of the provision in this paragraph (a)(1);
and
(2) Enable the derivatives clearing organization to cover its
operating costs for a period of at least one year, calculated on a
rolling basis. A derivatives clearing organization shall identify and
adequately manage its general business risks and hold sufficient liquid
resources to cover potential business losses that are not related to
clearing members' defaults, so that the derivatives clearing
organization can continue to provide services as a going concern.
(b) Types of financial resources. (1) Financial resources available
to satisfy the requirements of paragraph (a)(1) of this section may
include:
(i) The derivatives clearing organization's own capital;
(ii) Guaranty fund deposits;
(iii) Default insurance;
(iv) Potential assessments for additional guaranty fund
contributions, if permitted by the derivatives clearing organization's
rules; and
(v) Any other financial resource deemed acceptable by the
Commission.
(2) Financial resources available to satisfy the requirements of
paragraph (a)(2) of this section shall include:
(i) The derivatives clearing organization's own capital; and
(ii) Any other financial resource deemed acceptable to the
Commission.
(3) A financial resource may be allocated, in whole or in part, to
satisfy the requirements of either paragraph (a)(1) or (2) of this
section, but not both paragraphs, and only to the extent the use of
such financial resource is not otherwise limited by the Act, Commission
regulations in this chapter, the derivatives clearing organization's
rules, or any other contractual arrangements to which the derivatives
clearing organization is a party.
[[Page 22269]]
(c) Calculation of financial resources requirements. (1) A
derivatives clearing organization shall, on a monthly basis, perform
stress tests that will allow it to make a reasonable calculation of the
financial resources needed to meet the requirements of paragraph (a)(1)
of this section. The derivatives clearing organization shall have
reasonable discretion in determining the methodology used to calculate
the requirements, subject to the limitations identified in paragraph
(c)(2) of this section, and provided that the methodology must take
into account both historical data and hypothetical scenarios. The
Commission may review the methodology and require changes as
appropriate. The requirements of this paragraph (c) do not apply to
fully-collateralized positions.
(2) When calculating its largest financial exposure, a derivatives
clearing organization:
(i) In netting its exposure against the clearing member's initial
margin, shall:
(A) Use that portion of the margin amount on deposit that is
required; and
(B) Use customer initial margin only to the extent permitted by
parts 1 and 22 of this chapter, as applicable;
(ii) Shall combine the customer and house stress test losses of
each clearing member using the same stress test scenarios;
(iii) May net any gains in the house account with losses in the
customer account, if permitted by the derivatives clearing
organization's rules, but shall not net losses in the house account
with gains in the customer account; and
(iv) With respect to a clearing member's cleared swaps customer
account, may net gains for one customer against losses for another
customer only to the extent permitted by the derivatives clearing
organization's rules.
(3) A derivatives clearing organization shall, on a monthly basis,
make a reasonable calculation of its projected operating costs over a
12-month period in order to determine the amount needed to meet the
requirements of paragraph (a)(2) of this section. The derivatives
clearing organization shall have reasonable discretion in determining
the methodology used to compute such projected operating costs. The
Commission may review the methodology and require changes as
appropriate.
(d) Valuation of financial resources. (1) At appropriate intervals,
but not less than monthly, a derivatives clearing organization shall
compute the current market value of each financial resource used to
meet its obligations under paragraph (a) of this section. Reductions in
value to reflect credit, market, and liquidity risks (haircuts) shall
be applied as appropriate and evaluated on a monthly basis.
(2) If assessments for additional guaranty fund contributions are
permitted by the derivatives clearing organization's rules, in
calculating the financial resources available to meet its obligations
under paragraph (a)(1) of this section:
(i) The derivatives clearing organization shall have rules
requiring that its clearing members have the ability to meet an
assessment within the time frame of a normal end-of-day variation
settlement cycle;
(ii) The derivatives clearing organization shall monitor the
financial and operational capacity of its clearing members to meet
potential assessments;
(iii) The derivatives clearing organization shall apply a 30
percent haircut to the value of potential assessments; and
(iv) The derivatives clearing organization shall only count the
value of assessments, after the haircut, to meet up to 20 percent of
the total amount required under paragraph (a)(1) of this section.
(e) Liquidity of financial resources. (1)(i) The derivatives
clearing organization shall effectively measure, monitor, and manage
its liquidity risks, maintaining sufficient liquid resources such that
it can, at a minimum, fulfill its cash obligations when due. The
derivatives clearing organization shall hold assets in a manner where
the risk of loss or of delay in its access to them is minimized.
(ii) The financial resources allocated by the derivatives clearing
organization to meet the requirements of paragraph (a)(1) of this
section shall be sufficiently liquid to enable the derivatives clearing
organization to fulfill its obligations as a central counterparty
during a one-day settlement cycle. The derivatives clearing
organization shall maintain cash, U.S. Treasury obligations, or high
quality, liquid, general obligations of a sovereign nation, in an
amount greater than or equal to an amount calculated as follows:
(A) Calculate the average daily settlement variation pay for each
clearing member over the last fiscal quarter;
(B) Calculate the sum of those average daily settlement variation
pays; and
(C) Using that sum, calculate the average of its clearing members'
average daily settlement variation pays.
(iii) If the total amount of the financial resources required
pursuant to the calculation set forth in paragraph (e)(1)(ii) of this
section is insufficient to enable the derivatives clearing organization
to fulfill its obligations during a one-day settlement cycle, the
derivatives clearing organization may take into account a committed
line of credit or similar facility for the purpose of meeting the
remainder of the requirement of this paragraph (e) (subject to the
limitation in paragraph (e)(3) of this section).
(iv) A derivatives clearing organization is not subject to
paragraph (e)(1)(ii) of this section for fully-collateralized
positions.
(2) The financial resources allocated by the derivatives clearing
organization to meet the requirements of paragraph (a)(2) of this
section must include unencumbered, liquid financial assets (i.e., cash
and/or highly liquid securities) sufficient to enable the derivatives
clearing organization to cover its operating costs for a period of at
least six months. If the financial resources allocated to meet the
requirements of paragraph (a)(2) of this section do not include such
assets in a sufficient amount, the derivatives clearing organization
may take into account a committed line of credit or similar facility
for the purpose of meeting the requirements of this paragraph (subject
to the limitation in paragraph (e)(3) of this section).
(3) A committed line of credit or similar facility may be
allocated, in whole or in part, to satisfy the requirements of either
paragraph (e)(1)(ii) or (e)(2) of this section, but not both
paragraphs.
(4)(i) Assets in a guaranty fund shall have minimal credit, market,
and liquidity risks and shall be readily accessible on a same-day
basis;
(ii) Cash balances shall be invested or placed in safekeeping in a
manner that bears little or no principal risk; and
(iii) Letters of credit shall not be a permissible asset for a
guaranty fund.
(f) Reporting requirements--(1) Quarterly reporting. Each fiscal
quarter, or at any time upon Commission request, a derivatives clearing
organization shall:
(i) Report to the Commission:
(A) The amount of financial resources necessary to meet the
requirements of paragraph (a) of this section and Sec. Sec. 39.33(a)
and 39.39(d), if applicable;
(B) The value of each financial resource available, computed in
accordance with the requirements of paragraph (d) of this section; and
(C) The manner in which the derivatives clearing organization meets
the liquidity requirements of paragraph (e) of this section.
(ii) Provide the Commission with a financial statement, including
the balance sheet, income statement, and
[[Page 22270]]
statement of cash flows, prepared in accordance with U.S. generally
accepted accounting principles, of the derivatives clearing
organization; provided, however, that for a derivatives clearing
organization that is incorporated or organized under the laws of any
foreign country, the financial statement may be prepared in accordance
with either U.S. generally accepted accounting principles or the
International Financial Reporting Standards issued by the International
Accounting Standards Board. The balance sheet must identify any assets
allocated to satisfy the requirements of paragraph (a)(1) or (2) of
this section as held for that purpose; and
(iii) Report to the Commission the value of each individual
clearing member's guaranty fund deposit, if the derivatives clearing
organization reports having guaranty fund deposits as a financial
resource available to satisfy the requirements of paragraph (a)(1) of
this section and Sec. Sec. 39.33(a) and 39.39(d), if applicable.
(iv) The calculations required by this paragraph (f) shall be made
as of the last business day of the derivatives clearing organization's
fiscal quarter. The report shall be submitted not later than 17
business days after the end of the derivatives clearing organization's
fiscal quarter, or at such later time as the Commission may permit, in
its discretion, upon request by the derivatives clearing organization.
(2) Annual reporting. (i) A derivatives clearing organization shall
submit to the Commission an audited year-end financial statement of the
derivatives clearing organization calculated in accordance with U.S.
generally accepted accounting principles; provided, however, that for a
derivatives clearing organization that is incorporated or organized
under the laws of any foreign country, the financial statement may be
prepared in accordance with either U.S. generally accepted accounting
principles or the International Financial Reporting Standards issued by
the International Accounting Standards Board. The balance sheet must
identify any assets allocated to satisfy the requirements of paragraph
(a)(1) or (2) of this section as held for that purpose.
(ii) The report required by paragraph (f)(2)(i) of this section
shall be submitted not later than 90 days after the end of the
derivatives clearing organization's fiscal year, or at such later time
as the Commission may permit, in its discretion, upon request by the
derivatives clearing organization.
(iii) A derivatives clearing organization shall submit concurrently
with the audited year-end financial statement required by paragraph
(f)(2)(i) of this section:
(A) A reconciliation, including appropriate explanations, of its
balance sheet in the audited year-end financial statement with the
balance sheet in the derivatives clearing organization's financial
statement for the last quarter of the fiscal year when material
differences exist or, if no material differences exist, a statement so
indicating; and
(B) Such further information as may be necessary to make the
statements not misleading.
(3) Other reporting. (i) A derivatives clearing organization shall
provide to the Commission as part of its first report under paragraph
(f)(1) of this section, and in the event of any change thereafter:
(A) Sufficient documentation explaining the methodology used to
compute its financial resources requirements under paragraph (a) of
this section and Sec. Sec. 39.33(a) and 39.39(d), if applicable; and
(B) Sufficient documentation explaining the basis for its
determinations regarding the valuation and liquidity requirements set
forth in paragraphs (d) and (e) of this section.
(ii) A derivatives clearing organization shall provide to the
Commission copies of any agreements establishing or amending a credit
facility, insurance coverage, or other arrangement evidencing or
otherwise supporting the derivatives clearing organization's
conclusions regarding its:
(A) Financial resources available to satisfy the requirements of
paragraph (a) of this section and Sec. Sec. 39.33(a) and 39.39(d), if
applicable; and
(B) Liquidity resources available to satisfy the requirements of
paragraph (e) of this section and Sec. 39.33(c), if applicable.
(4) Certification. A derivatives clearing organization shall
provide with each report submitted pursuant to this section a
certification by the person responsible for the accuracy and
completeness of the report that, to the best of his or her knowledge
and reasonable belief, and under penalty of law, the information
contained in the report is accurate and complete.
0
13. In Sec. 39.12, revise paragraphs (a) introductory text, (a)(1)
introductory text, (a)(1)(i), (a)(4), (5) and (6), (b)(1) introductory
text, and (b)(2) to read as follows:
Sec. 39.12 Participant and product eligibility.
(a) Participant eligibility. A derivatives clearing organization
shall have appropriate admission and continuing participation
requirements for clearing members of the derivatives clearing
organization that are objective, publicly disclosed, and risk-based.
(1) Fair and open access for participation. The participation
requirements shall permit fair and open access.
(i) A derivatives clearing organization shall not have restrictive
clearing member standards if less restrictive requirements that achieve
the same objective and that would not materially increase risk to the
derivatives clearing organization or clearing members could be adopted;
* * * * *
(4) Monitoring. A derivatives clearing organization shall have
procedures to verify, on an ongoing basis, the compliance of each
clearing member with each participation requirement of the derivatives
clearing organization.
(5) Reporting. (i) A derivatives clearing organization shall
require all clearing members, including non-futures commission
merchants, to provide to the derivatives clearing organization periodic
financial reports that contain any financial information that the
derivatives clearing organization determines is necessary to assess
whether participation requirements are being met on an ongoing basis.
(ii) A derivatives clearing organization shall require clearing
members that are futures commission merchants to provide the financial
reports that are specified in Sec. 1.10 of this chapter to the
derivatives clearing organization.
(iii) A derivatives clearing organization shall require clearing
members that are not futures commission merchants to make the periodic
financial reports provided pursuant to paragraph (a)(5)(i) of this
section available to the Commission upon the Commission's request or,
in lieu of imposing the requirement in this paragraph (a)(5)(iii), a
derivatives clearing organization may provide such financial reports
directly to the Commission upon the Commission's request.
(iv) A derivatives clearing organization shall have rules that
require clearing members to provide to the derivatives clearing
organization, in a timely manner, information that concerns any
financial or business developments that may materially affect the
clearing members' ability to continue to comply with participation
requirements under this section.
(v) The requirements in paragraphs (a)(5)(i) and (iii) of this
section shall not apply with respect to non-futures commission merchant
clearing members of a derivatives clearing organization
[[Page 22271]]
that only clear fully-collateralized positions.
(6) Enforcement. A derivatives clearing organization shall have the
ability to enforce compliance with its participation requirements and
shall have procedures for the suspension and orderly removal of
clearing members that no longer meet the requirements.
(b) * * *
(1) A derivatives clearing organization shall have appropriate
requirements for determining the eligibility of agreements, contracts,
or transactions submitted to the derivatives clearing organization for
clearing, taking into account the derivatives clearing organization's
ability to manage the risks associated with such agreements, contracts,
or transactions. Factors to be considered in determining product
eligibility include, but are not limited to:
* * * * *
(2) A derivatives clearing organization that clears swaps shall
have rules providing that all swaps with the same terms and conditions,
as defined by product specifications established under derivatives
clearing organization rules, submitted to the derivatives clearing
organization for clearing are economically equivalent within the
derivatives clearing organization and may be offset with each other
within the derivatives clearing organization.
* * * * *
0
14. In Sec. 39.13, revise paragraphs (b), (f), (g)(2)(i), (g)(3),
(g)(4)(i) introductory text, (g)(7), (8) and (12), (h)(1)(i)
introductory text, and (h)(3) and (5) and add paragraph (i) to read as
follows:
Sec. 39.13 Risk management.
* * * * *
(b) Risk management framework. A derivatives clearing organization
shall have and implement written policies, procedures, and controls,
approved by its board of directors, that establish an appropriate risk
management framework that, at a minimum, clearly identifies and
documents the range of risks to which the derivatives clearing
organization is exposed, addresses the monitoring and management of the
entirety of those risks, and provides a mechanism for internal audit.
The risk management framework shall be regularly reviewed and updated
as necessary.
* * * * *
(f) Limitation of exposure to potential losses from defaults. A
derivatives clearing organization, through margin requirements and
other risk control mechanisms, shall limit its exposure to potential
losses from defaults by its clearing members to minimize the risk that:
(1) The operations of the derivatives clearing organization would
be disrupted; and
(2) Non-defaulting clearing members would be exposed to losses that
non-defaulting clearing members cannot anticipate or control.
(g) * * *
(2) * * *
(i) A derivatives clearing organization shall have initial margin
requirements that are commensurate with the risks of each product and
portfolio, including any unusual characteristics of, or risks
associated with, particular products or portfolios, including but not
limited to jump-to-default risk or similar jump risk, and concentration
of positions.
* * * * *
(3) Independent validation. A derivatives clearing organization
shall have its systems for generating initial margin requirements,
including its theoretical models, reviewed and validated by a qualified
and independent party on an annual basis. Such qualified and
independent parties may be independent contractors or employees of the
derivatives clearing organization, or of an affiliate of the
derivatives clearing organization, but shall not be persons responsible
for development or operation of the systems and models being tested.
(4) * * *
(i) A derivatives clearing organization may allow reductions in
initial margin requirements for related positions if the price risks
with respect to such positions are significantly and reliably
correlated. The price risks of different positions will only be
considered to be reliably correlated if there is a conceptual basis for
the correlation in addition to an exhibited statistical correlation.
That conceptual basis may include, but is not limited to, the
following:
* * * * *
(7) Back tests. A derivatives clearing organization shall conduct
back tests, as defined in Sec. 39.2, using an appropriate time period
but not less than the previous 30 days, as follows:
(i) On a daily basis, a derivatives clearing organization shall
conduct back tests with respect to products or swap portfolios that are
experiencing significant market volatility, to test the adequacy of its
initial margin requirements, as follows:
(A) For that product if the derivatives clearing organization uses
a product-based margin methodology;
(B) For each spread involving that product if there is a defined
spread margin rate;
(C) For each account held by a clearing member at the derivatives
clearing organization that contains a significant position in that
product, by house origin and by each customer origin; and
(D) For each such swap portfolio, including any portfolio
containing futures and/or options and held in a commingled account
pursuant to Sec. 39.15(b)(2), by beneficial owner.
(ii) On at least a monthly basis, a derivatives clearing
organization shall conduct back tests to test the adequacy of its
initial margin requirements, as follows:
(A) For each product for which the derivatives clearing
organization uses a product-based margin methodology;
(B) For each spread for which there is a defined spread margin
rate;
(C) For each account held by a clearing member at the derivatives
clearing organization, by house origin and by each customer origin; and
(D) For each swap portfolio, including any portfolio containing
futures and/or options and held in a commingled account pursuant to
Sec. 39.15(b)(2), by beneficial owner.
(iii) In conducting back tests of initial margin requirements, a
derivatives clearing organization shall compare portfolio losses only
to those components of initial margin that capture changes in market
risk factors.
(8) Customer margin--(i) Gross margin. (A) During the end-of-day
settlement cycle, a derivatives clearing organization shall collect
initial margin on a gross basis for each clearing member's customer
account(s) equal to the sum of the initial margin amounts that would be
required by the derivatives clearing organization for each individual
customer within that account if each individual customer were a
clearing member.
(B) For purposes of calculating the gross initial margin
requirement for each clearing member's customer account(s), a
derivatives clearing organization shall have rules that require its
clearing members to provide to the derivatives clearing organization
reports each day setting forth end-of-day gross positions of each
beneficial owner within each customer origin of the clearing member.
(C) A derivatives clearing organization may not, and may not permit
its clearing members to, net positions of different customers against
one another.
(D) A derivatives clearing organization may collect initial margin
for its clearing members' house accounts on a net basis.
(ii) Customer initial margin requirements. A derivatives clearing
[[Page 22272]]
organization shall require its clearing members to collect customer
initial margin at a level that is not less than 100 percent of the
derivatives clearing organization's clearing initial margin
requirements with respect to each product and portfolio and
commensurate with the risk presented by each customer account. The
derivatives clearing organization shall have reasonable discretion in
determining whether and by how much such customer initial margin
requirements must exceed the derivatives clearing organization's
clearing initial margin requirements with respect to particular
products or portfolios. The Commission may review such customer initial
margin levels and require different levels if the Commission deems the
levels insufficient to protect the financial integrity of the
derivatives clearing organization or its clearing members.
(iii) Withdrawal of customer initial margin. A derivatives clearing
organization shall require its clearing members to ensure that their
customers do not withdraw funds from their accounts with such clearing
members unless the net liquidating value plus the margin deposits
remaining in a customer's account after such withdrawal are sufficient
to meet the customer initial margin requirements with respect to all
products and swap portfolios held in such customer's account which are
cleared by the derivatives clearing organization.
* * * * *
(12) Haircuts. A derivatives clearing organization shall apply
appropriate reductions in value to reflect credit, market, and
liquidity risks (haircuts), to the assets that it accepts in
satisfaction of initial margin obligations, taking into consideration
stressed market conditions, and shall evaluate the appropriateness of
the haircuts on at least a monthly basis.
* * * * *
(h) * * *
(1) * * *
(i) A derivatives clearing organization shall impose risk limits on
each clearing member, by house origin and by each customer origin, in
order to prevent a clearing member from carrying positions for which
the risk exposure exceeds a specified threshold relative to the
clearing member's and/or the derivatives clearing organization's
financial resources, and to address positions that may be difficult to
liquidate. The derivatives clearing organization shall have reasonable
discretion in determining:
* * * * *
(3) Stress tests. A derivatives clearing organization shall conduct
stress tests, as defined in Sec. 39.2, as follows:
(i) On a daily basis, a derivatives clearing organization shall
conduct stress tests with respect to each large trader who poses
significant risk to a clearing member or the derivatives clearing
organization, including futures, options, and swaps cleared by the
derivatives clearing organization, which are held by all clearing
members carrying accounts for each such large trader. The derivatives
clearing organization shall have reasonable discretion in determining
which traders to test and the methodology used to conduct such stress
tests. The Commission may review the selection of accounts and the
methodology and require changes, as appropriate.
(ii) On at least a weekly basis, a derivatives clearing
organization shall conduct stress tests with respect to each clearing
member account, by house origin and by each customer origin, and each
swap portfolio, including any portfolio containing futures and/or
options and held in a commingled account pursuant to Sec. 39.15(b)(2),
by beneficial owner, under extreme but plausible market conditions. The
derivatives clearing organization shall have reasonable discretion in
determining the methodology used to conduct such stress tests. The
Commission may review the methodology and require changes, as
appropriate.
(iii) The requirements in paragraphs (h)(3)(i) and (ii) of this
section do not apply with respect to clearing member accounts that hold
only fully-collateralized positions.
* * * * *
(5) Clearing members' risk management policies and procedures. (i)
A derivatives clearing organization shall have rules that:
(A) Require its clearing members to maintain current written risk
management policies and procedures, which address the risks that such
clearing members may pose to the derivatives clearing organization;
(B) Ensure that it has the authority to request and obtain
information and documents from its clearing members regarding their
risk management policies, procedures, and practices, including, but not
limited to, information and documents relating to the liquidity of
their financial resources and their settlement procedures; and
(C) Require its clearing members to make information and documents
regarding their risk management policies, procedures, and practices
available to the Commission upon the Commission's request.
(ii) A derivatives clearing organization shall review the risk
management policies, procedures, and practices of each of its clearing
members, which address the risks that such clearing members may pose to
the derivatives clearing organization, on a periodic basis, take
appropriate action to address concerns identified in such reviews, and
document such reviews and the basis for determining what action was
appropriate to take.
* * * * *
(i) Cross-margining. (1) A derivatives clearing organization that
seeks to implement a cross-margining program with one or more clearing
organizations shall file rules for Commission approval pursuant to
Sec. 40.5 of this chapter that contain, at a minimum, the following
information:
(i) Identification of the products that would be eligible for
cross-margining, including product specifications or criteria that
would be used to define eligible products;
(ii) Analysis of the risk characteristics of the eligible products;
(iii) Analysis of the liquidity of the respective markets for the
eligible products, including the ability of clearing members and the
derivatives clearing organization to offset or mitigate the risk of
such products in a timely manner and proposed means for addressing
insufficient liquidity;
(iv) Analysis of the availability of reliable prices for each of
the eligible products;
(v) Financial and operational requirements that would apply to
clearing members participating in the program;
(vi) A description and analysis of the margin methodology that
would be used to calculate initial margin requirements, including:
(A) Any margin reduction applied to correlated positions; and
(B) Information regarding the correlations between eligible
products, including the stability of the relationship among the
eligible products and the potential impact a change in the correlations
could have on setting initial margin requirements;
(vii) Procedures the derivatives clearing organization would follow
in the event of a clearing member default, including any loss-sharing
arrangements;
(viii) A description of the arrangements for obtaining daily
position data with respect to products in the account;
(ix) Whether funds to support the cross-margined positions will be
[[Page 22273]]
maintained together in one account or in separate accounts at each
participating clearing organization; and
(x) A copy of the agreement between the clearing organizations
participating in the cross-margining program.
(2) The Commission may request additional information in support of
a rule submission filed under this paragraph (i), and may approve such
rules in accordance with Sec. 40.5 of this chapter.
0
15. Revise Sec. 39.15 to read as follows:
Sec. 39.15 Treatment of funds.
(a) Required standards and procedures. A derivatives clearing
organization shall establish standards and procedures that are designed
to protect and ensure the safety of funds and assets belonging to
clearing members and their customers.
(b) Customer funds--(1) Segregation. A derivatives clearing
organization shall comply with the applicable segregation requirements
of section 4d of the Act and Commission regulations in this part, or
any other applicable Commission regulation in this chapter or order
requiring that customer funds and assets, including money, securities,
and property, be segregated, set aside, or held in a separate account.
(2) Commingling--(i) Cleared swaps account. In order for a
derivatives clearing organization and its clearing members to commingle
customer positions in futures, options, foreign futures, foreign
options, and swaps, or any combination thereof, and any money,
securities, or property received to margin, guarantee or secure such
positions, in an account subject to the requirements of section 4d(f)
of the Act, the derivatives clearing organization shall file rules for
Commission approval pursuant to Sec. 40.5 of this chapter. Such rule
submission shall include, at a minimum, the following:
(A) Identification of the products that would be commingled,
including product specifications or the criteria that would be used to
define eligible products;
(B) Analysis of the risk characteristics of the eligible products;
(C) Identification of whether the swaps would be executed
bilaterally and/or executed on a designated contract market and/or a
swap execution facility;
(D) Analysis of the liquidity of the respective markets for the
eligible products, the ability of clearing members and the derivatives
clearing organization to offset or mitigate the risk of such eligible
products in a timely manner, without compromising the financial
integrity of the account, and, as appropriate, proposed means for
addressing insufficient liquidity;
(E) Analysis of availability of reliable prices for each of the
eligible products;
(F) A description of the financial, operational, and managerial
standards or requirements for clearing members that would be permitted
to commingle eligible products;
(G) A description of the systems and procedures that would be used
by the derivatives clearing organization to oversee such clearing
members' risk management of any such commingled positions;
(H) A description of the financial resources of the derivatives
clearing organization, including the composition and availability of a
guaranty fund with respect to the eligible products that would be
commingled;
(I) A description and analysis of the margin methodology that would
be applied to the commingled eligible products, including any margin
reduction applied to correlated positions, and any applicable margin
rules with respect to both clearing members and customers;
(J) An analysis of the ability of the derivatives clearing
organization to manage a potential default with respect to any of the
eligible products that would be commingled;
(K) A discussion of the procedures that the derivatives clearing
organization would follow if a clearing member defaulted, and the
procedures that a clearing member would follow if a customer defaulted,
with respect to any of the commingled eligible products in the account;
and
(L) A description of the arrangements for obtaining daily position
data with respect to eligible products in the account.
(ii) Futures account. In order for a derivatives clearing
organization and its clearing members to commingle customer positions
in futures, options, foreign futures, foreign options, and swaps, or
any combination thereof, and any money, securities, or property
received to margin, guarantee or secure such positions, in an account
subject to the requirements of section 4d(a) of the Act, the
derivatives clearing organization shall file rules for Commission
approval pursuant to Sec. 40.5 of this chapter. Such rule submission
shall include, at a minimum, the information required under paragraph
(b)(2)(i) of this section.
(iii) Commission action. The Commission may request additional
information in support of a rule submission filed under paragraph
(b)(2)(i) or (ii) of this section, and may approve such rules in
accordance with Sec. 40.5 of this chapter.
(c) Holding of funds and assets. A derivatives clearing
organization shall hold funds and assets belonging to clearing members
and their customers in a manner which minimizes the risk of loss or of
delay in the access by the derivatives clearing organization to such
funds and assets.
(d) Transfer of customer positions. A derivatives clearing
organization shall have rules providing that the derivatives clearing
organization will promptly transfer all or a portion of a customer's
portfolio of positions, and related funds as necessary, from the
carrying clearing member of the derivatives clearing organization to
another clearing member of the derivatives clearing organization,
without requiring the close-out and re-booking of the positions prior
to the requested transfer, subject to the following conditions:
(1) The customer has instructed the carrying clearing member to
make the transfer;
(2) The customer is not currently in default to the carrying
clearing member;
(3) The transferred positions will have appropriate margin at the
receiving clearing member;
(4) Any remaining positions will have appropriate margin at the
carrying clearing member; and
(5) The receiving clearing member has consented to the transfer.
(e) Permitted investments. Funds and assets belonging to clearing
members and their customers that are invested by a derivatives clearing
organization shall be held in instruments with minimal credit, market,
and liquidity risks. Any investment of customer funds or assets,
including cleared swaps customer collateral, as defined in Sec. 22.1
of this chapter, by a derivatives clearing organization shall comply
with Sec. 1.25 of this chapter.
0
16. Revise Sec. 39.16 to read as follows:
Sec. 39.16 Default rules and procedures.
(a) General. A derivatives clearing organization shall have rules
and procedures designed to allow for the efficient, fair, and safe
management of events during which clearing members become insolvent or
default on the obligations of such clearing members to the derivatives
clearing organization.
(b) Default management plan. A derivatives clearing organization
shall maintain a current written default management plan that
delineates the roles and responsibilities of its board of directors,
its risk management committee, any other committee that a derivatives
clearing organization may have that has responsibilities for default
[[Page 22274]]
management, and the derivatives clearing organization's management, in
addressing a default, including any necessary coordination with, or
notification of, other entities and regulators. Such plan shall address
any differences in procedures with respect to highly liquid products
and less liquid products. A derivatives clearing organization shall
conduct and document a test of its default management plan at least on
an annual basis. The derivatives clearing organization shall include
clearing members in a test of its default management plan at least on
an annual basis.
(c) Default procedures. (1) A derivatives clearing organization
shall have procedures that would permit the derivatives clearing
organization to take timely action to contain losses and liquidity
pressures and to continue meeting its obligations in the event of a
default on the obligations of a clearing member to the derivatives
clearing organization. The derivatives clearing organization shall have
a default committee that would be convened in the event of a default
involving substantial or complex positions to help identify market
issues with any action the derivatives clearing organization is
considering. The default committee shall include clearing members and
may include other participants to help the derivatives clearing
organization efficiently manage the house or customer positions of the
defaulting clearing member.
(2) A derivatives clearing organization shall have rules that set
forth its default procedures, including:
(i) The derivatives clearing organization's definition of a
default;
(ii) The actions that the derivatives clearing organization may
take upon a default, which shall include immediate public notice of a
declaration of default on its website and the prompt transfer,
liquidation, or hedging of the customer or house positions of the
defaulting clearing member, as applicable, and which may include, in
the discretion of the derivatives clearing organization, the auctioning
or allocation of such positions to other clearing members;
(iii) Any obligations that the derivatives clearing organization
imposes on its clearing members to participate in auctions, or to
accept allocations, of the customer or house positions of the
defaulting clearing member, provided that:
(A) The derivatives clearing organization shall permit a clearing
member to outsource to a qualified third party, authority to act in the
clearing member's place in any auction, subject to appropriate
safeguards imposed by the derivatives clearing organization;
(B) The derivatives clearing organization shall permit a clearing
member to outsource to a qualified third party, authority to act in the
clearing member's place in any allocations, subject to appropriate
safeguards imposed by the derivatives clearing organization; and
(C) The derivatives clearing organization shall not require a
clearing member to bid for a portion of, or accept an allocation of,
the defaulting clearing member's positions that is not proportional to
the size of the bidding or accepting clearing member's positions in the
same product class at the derivatives clearing organization, as
measured by the clearing initial margin requirement for those
positions;
(iv) The sequence in which the funds and assets of the defaulting
clearing member and its customers and the financial resources
maintained by the derivatives clearing organization would be applied in
the event of a default;
(v) A provision that the funds and assets of a defaulting clearing
member's customers shall not be applied to cover losses with respect to
a house default; and
(vi) A provision that the excess house funds and assets of a
defaulting clearing member shall be applied to cover losses with
respect to a customer default, if the relevant customer funds and
assets are insufficient to cover the shortfall.
(3) A derivatives clearing organization shall make its default
rules publicly available as provided in Sec. 39.21.
(d) Insolvency of a clearing member. (1) A derivatives clearing
organization shall have rules that require a clearing member to provide
prompt notice to the derivatives clearing organization if it becomes
the subject of a bankruptcy petition, receivership proceeding, or the
equivalent;
(2) No later than upon receipt of such notice, a derivatives
clearing organization shall review the continuing eligibility of the
clearing member for clearing membership; and
(3) No later than upon receipt of such notice, a derivatives
clearing organization shall take any appropriate action, in its
discretion, with respect to such clearing member or its house or
customer positions, including but not limited to liquidation or
transfer of positions, suspension, or revocation of clearing
membership.
0
17. Revise Sec. 39.17 to read as follows:
Sec. 39.17 Rule enforcement.
(a) General. A derivatives clearing organization shall:
(1) Maintain adequate arrangements and resources for the effective
monitoring and enforcement of compliance (by itself and its clearing
members) with the rules of the derivatives clearing organization and
the resolution of disputes;
(2) Have the authority and ability to discipline, limit, suspend,
or terminate the activities of a clearing member due to a violation by
the clearing member of any rule of the derivatives clearing
organization; and
(3) Report to the Commission regarding rule enforcement activities
and sanctions imposed against clearing members as provided in paragraph
(a)(2) of this section, in accordance with Sec. 39.19(c)(4)(xvii).
(b) Authority to enforce rules. The board of directors of the
derivatives clearing organization may delegate responsibility for
compliance with the requirements of paragraph (a) of this section to an
appropriate committee, unless the responsibilities are otherwise
required to be carried out by the chief compliance officer pursuant to
the Act or this part.
0
18. Revise Sec. 39.19 to read as follows:
Sec. 39.19 Reporting.
(a) General. A derivatives clearing organization shall provide to
the Commission the information specified in this section and any other
information that the Commission determines to be necessary to conduct
oversight of the derivatives clearing organization.
(b) Submission of reports--(1) General requirement. A derivatives
clearing organization shall submit the information required by this
section to the Commission in a format and manner specified by the
Commission.
(2) Certification. When making a submission pursuant to this
section, an employee of the derivatives clearing organization must
certify that he or she is duly authorized to make such a submission on
behalf of the derivatives clearing organization.
(3) Time zones. Unless otherwise specified by the Commission or its
designee, any stated time in this section is Central time for
information concerning derivatives clearing organizations located in
that time zone, and Eastern time for information concerning all other
derivatives clearing organizations.
(c) Reporting requirements. Each registered derivatives clearing
organization shall provide to the Commission or other person as may be
required or permitted by this paragraph (c) the information specified
as follows:
[[Page 22275]]
(1) Daily reporting. (i) A derivatives clearing organization shall
compile as of the end of each trading day, and submit to the Commission
by 10:00 a.m. on the next business day, a report containing the
following information related to all positions other than fully-
collateralized positions:
(A) Initial margin requirements and initial margin on deposit for
each clearing member, by house origin and by each customer origin, and
by each individual customer account;
(B) Daily variation margin, separately listing the mark-to-market
amount collected from or paid to each clearing member, by house origin
and by each customer origin, and by each individual customer account;
(C) All other daily cash flows relating to clearing and settlement
including, but not limited to, option premiums and payments related to
swaps such as coupon amounts, collected from or paid to each clearing
member, by house origin and by each customer origin, and by each
individual customer account; and
(D) End-of-day positions, including as appropriate the risk
sensitivities and valuation data for such positions, for each clearing
member, by house origin and by each customer origin, and by each
individual customer account. The derivatives clearing organization
shall identify each individual customer account using both a legal
entity identifier and any internally-generated identifier, where
applicable, within each customer origin for each clearing member.
(ii) The report shall contain the information required by
paragraphs (c)(1)(i)(A) through (D) of this section for:
(A) All futures positions, and options positions, as applicable;
(B) All swaps positions; and
(C) All securities positions that are:
(1) Held in a customer account subject to section 4d of the Act; or
(2) Subject to a cross-margining agreement.
(2) Quarterly reporting. A derivatives clearing organization shall
provide to the Commission each fiscal quarter, or at any time upon
Commission request, a report of the derivatives clearing organization's
financial resources as required by Sec. 39.11(f)(1).
(3) Annual reporting. A derivatives clearing organization shall
provide to the Commission each year:
(i) The annual report of the chief compliance officer required by
Sec. 39.10; and
(ii) Audited year-end financial statements of the derivatives
clearing organization as required by Sec. 39.11(f)(2).
(iii) [Reserved]
(iv) The reports required by this paragraph (c)(3) shall be filed
not later than 90 days after the end of the derivatives clearing
organization's fiscal year, or at such later time as the Commission may
permit, in its discretion, upon request by the derivatives clearing
organization.
(4) Event specific reporting--(i) Decrease in financial resources.
If there is a decrease of 25 percent or more in the total value of the
financial resources available to satisfy the requirements under Sec.
39.11(a)(1) or Sec. 39.33(a), as applicable, either from the last
quarterly report submitted under Sec. 39.11(f) or from the value as of
the close of the previous business day, a derivatives clearing
organization shall report such decrease to the Commission no later than
one business day following the day the 25 percent threshold was
reached. The report shall include:
(A) The total value of the financial resources as of the close of
business the day the 25 percent threshold was reached;
(B) If reporting a decrease in value from the previous business
day, the total value of the financial resources immediately prior to
the 25 percent decline;
(C) A breakdown of the value of each financial resource reported in
each of paragraphs (c)(4)(i)(A) and (B) of this section, calculated in
accordance with the requirements of Sec. 39.11(d) or Sec. 39.33(b),
as applicable, including the value of each individual clearing member's
guaranty fund deposit if the derivatives clearing organization reports
guaranty fund deposits as a financial resource; and
(D) A detailed explanation for the decrease.
(ii) Decrease in liquidity resources. If there is a decrease of 25
percent or more in the total value of the liquidity resources available
to satisfy the requirements under Sec. 39.11(e) or Sec. 39.33(c), as
applicable, either from the last quarterly report submitted under Sec.
39.11(f) or from the value as of the close of the previous business
day, a derivatives clearing organization shall report such decrease to
the Commission no later than one business day following the day the 25
percent threshold was reached. The report shall include:
(A) The total value of the liquidity resources as of the close of
business the day the 25 percent threshold was reached;
(B) If reporting a decrease in value from the previous business
day, the total value of the liquidity resources immediately prior to
the 25 percent decline;
(C) A breakdown of the value of each liquidity resource reported in
each of paragraphs (c)(4)(ii)(A) and (B) of this section, calculated in
accordance with the requirements of Sec. 39.11(e) or Sec. 39.33(c),
as applicable, including the value of each individual clearing member's
guaranty fund deposit if the derivatives clearing organization reports
guaranty fund deposits as a liquidity resource; and
(D) A detailed explanation for the decrease.
(iii) Decrease in ownership equity. A derivatives clearing
organization shall report to the Commission no later than two business
days prior to an event which the derivatives clearing organization
knows or reasonably should know will cause a decrease of 20 percent or
more in ownership equity from the last reported ownership equity
balance as reported on a quarterly or audited financial statement
required to be submitted by paragraph (c)(2) or (c)(3)(ii),
respectively, of this section; but in any event no later than two
business days after such decrease in ownership equity for events that
caused the decrease about which the derivatives clearing organization
did not know and reasonably could not have known prior to the event.
The report shall include:
(A) Pro forma financial statements reflecting the derivatives
clearing organization's estimated future financial condition following
the anticipated decrease for reports submitted prior to the anticipated
decrease and current financial statements for reports submitted after
such a decrease; and
(B) A detailed explanation for the decrease or anticipated decrease
in the balance.
(iv) Six-month liquid asset requirement. A derivatives clearing
organization shall notify the Commission immediately when the
derivatives clearing organization knows or reasonably should know of a
deficit in the six-month liquid asset requirement of Sec. 39.11(e)(2).
(v) Change in current assets. A derivatives clearing organization
shall notify the Commission no later than two business days after the
derivatives clearing organization's current liabilities exceed its
current assets. The notice shall include a balance sheet that reflects
the derivatives clearing organization's current assets and current
liabilities and an explanation as to the reason for the negative
balance.
(vi) Request to clearing member to reduce its positions. A
derivatives clearing organization shall notify the Commission
immediately of a request by the derivatives clearing organization
[[Page 22276]]
to one of its clearing members to reduce the clearing member's
positions. The notice shall include:
(A) The name of the clearing member;
(B) The time the clearing member was contacted;
(C) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, by which the
derivatives clearing organization requested the reduction;
(D) All products that are the subject of the request; and
(E) The reason for the request.
(vii) Determination to transfer or liquidate positions. A
derivatives clearing organization shall notify the Commission
immediately of a determination by the derivatives clearing organization
that a position it carries for one of its clearing members must be
liquidated immediately or transferred immediately, or that the trading
of any account of a clearing member shall be only for the purpose of
liquidation because that clearing member has failed to meet an initial
or variation margin call or has failed to fulfill any other financial
obligation to the derivatives clearing organization. The notice shall
include:
(A) The name of the clearing member;
(B) The time the clearing member was contacted;
(C) The products that are subject to the determination;
(D) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, that are subject
to the determination; and
(E) The reason for the determination.
(viii) Default of a clearing member. A derivatives clearing
organization shall notify the Commission immediately of the default of
a clearing member. An event of default shall be determined in
accordance with the rules of the derivatives clearing organization. The
notice of default shall include:
(A) The name of the clearing member;
(B) The products the clearing member defaulted upon;
(C) The number of positions for futures and options, and for swaps,
the number of outstanding trades and notional amount, the clearing
member defaulted upon; and
(D) The amount of the financial obligation.
(ix) Change in ownership or corporate or organizational structure--
(A) Reporting requirement. A derivatives clearing organization shall
report to the Commission any anticipated change in the ownership or
corporate or organizational structure of the derivatives clearing
organization or its parent(s) that would:
(1) Result in at least a 10 percent change of ownership of the
derivatives clearing organization;
(2) Create a new subsidiary or eliminate a current subsidiary of
the derivatives clearing organization; or
(3) Result in the transfer of all or substantially all of the
assets of the derivatives clearing organization to another legal
entity.
(B) Required information. The report shall include: A chart
outlining the new ownership or corporate or organizational structure; a
brief description of the purpose and impact of the change; and any
relevant agreements effecting the change and corporate documents such
as articles of incorporation and bylaws.
(C) Time of report. The report shall be submitted to the Commission
no later than three months prior to the anticipated change, provided
that the derivatives clearing organization may report the anticipated
change to the Commission later than three months prior to the
anticipated change if the derivatives clearing organization does not
know and reasonably could not have known of the anticipated change
three months prior to the anticipated change. In such event, the
derivatives clearing organization shall immediately report such change
to the Commission as soon as it knows of such change.
(D) Confirmation of change report. The derivatives clearing
organization shall report to the Commission the consummation of the
change no later than two business days following the effective date of
the change.
(x) Change in key personnel. A derivatives clearing organization
shall report to the Commission no later than two business days
following the departure or addition of persons who are key personnel as
defined in Sec. 39.2. The report shall include, as applicable, the
name and contact information of the person who will assume the duties
of the position permanently or the person who will assume the duties on
a temporary basis until a permanent replacement fills the position.
(xi) Change in legal name. A derivatives clearing organization
shall report to the Commission no later than two business days
following a legal name change of the derivatives clearing organization.
(xii) Change in credit facility funding arrangement. A derivatives
clearing organization shall report to the Commission no later than one
business day after the derivatives clearing organization changes a
credit facility funding arrangement it has in place, or is notified
that such arrangement has changed, including but not limited to a
change in lender, change in the size of the facility, change in
expiration date, or any other material changes or conditions.
(xiii) Change in liquidity funding arrangement. A derivatives
clearing organization shall report to the Commission no later than one
business day after the derivatives clearing organization changes a
liquidity funding arrangement it has in place, or is notified that such
arrangement has changed, including but not limited to a change in
provider, change in the size of the facility, change in expiration
date, or any other material changes or conditions.
(xiv) Change in settlement bank arrangements. A derivatives
clearing organization shall report to the Commission no later than one
business day after any change in the derivatives clearing
organization's arrangements with any settlement bank used by the
derivatives clearing organization or approved for use by the
derivatives clearing organization's clearing members.
(xv) Settlement bank issues. A derivatives clearing organization
shall report to the Commission no later than one business day after any
material issues or concerns arise regarding the performance, stability,
liquidity, or financial resources of any settlement bank used by the
derivatives clearing organization or approved for use by the
derivatives clearing organization's clearing members.
(xvi) Change in depositories for customer funds. A derivatives
clearing organization shall report to the Commission no later than one
business day after any change in the derivatives clearing
organization's arrangements with any depository of customer funds.
(xvii) Sanctions against a clearing member. A derivatives clearing
organization shall provide notice to the Commission no later than two
business days after the derivatives clearing organization imposes
sanctions against a clearing member.
(xviii) Financial condition and events. A derivatives clearing
organization shall provide to the Commission immediate notice after the
derivatives clearing organization knows or reasonably should have known
of:
(A) The institution of any legal proceedings which may have a
material adverse financial impact on the derivatives clearing
organization;
(B) Any event, circumstance or situation that materially impedes
the derivatives clearing organization's ability to comply with this
part and is not otherwise required to be reported under this section;
or
[[Page 22277]]
(C) A material adverse change in the financial condition of any
clearing member that is not otherwise required to be reported under
this section.
(xix) Financial statements material inadequacies. A derivatives
clearing organization shall provide notice to the Commission within 24
hours if the derivatives clearing organization discovers or is notified
by an independent public accountant of the existence of any material
inadequacy in a financial statement, and within 48 hours after giving
such notice provide a written report stating what steps have been and
are being taken to correct the material inadequacy.
(xx) Change in fiscal year. A derivatives clearing organization
shall provide to the Commission immediate notice of any change to the
start and end dates of its fiscal year.
(xxi) Change in independent accounting firm. A derivatives clearing
organization shall report to the Commission no later than one business
day after any change in the derivatives clearing organization's
independent public accounting firm. The report shall include the date
of such change, the name and contact information of the new firm, and
the reason for the change.
(xxii) Major decision of the board of directors. A derivatives
clearing organization shall report to the Commission any major decision
of the derivatives clearing organization's board of directors as
required by Sec. 39.24(a)(3)(i).
(xxiii) System safeguards. A derivatives clearing organization
shall report to the Commission:
(A) Exceptional events as required by Sec. 39.18(g); or
(B) Planned changes as required by Sec. 39.18(h).
(xxiv) Margin model issues. A derivatives clearing organization
shall report to the Commission no later than one business day after any
issue occurs with a DCO's margin model, including margin models for
cross-margined portfolios, that affects the DCO's ability to calculate
or collect initial margin or variation margin.
(xxv) Recovery and wind-down plans. A derivatives clearing
organization that is required to maintain recovery and wind-down plans
pursuant to Sec. 39.39(b) shall submit its plans to the Commission no
later than the date on which the derivatives clearing organization is
required to have the plans. A derivatives clearing organization that is
not required to maintain recovery and wind-down plans pursuant to Sec.
39.39(b), but which nonetheless maintains such plans, may choose to
submit its plans to the Commission. A derivatives clearing organization
that has submitted its recovery and wind-down plans to the Commission
shall, upon making any revisions to the plans, submit the revised plans
to the Commission along with a description of the changes and the
reason for those changes.
(xxvi) New product accepted for clearing. A derivatives clearing
organization shall provide notice to the Commission no later than 30
calendar days prior to accepting a new product for clearing. The notice
shall include:
(A) A brief description of the new product;
(B) The date on which the derivatives clearing organization intends
to begin accepting the new product for clearing;
(C) A statement as to whether the new product will require the
derivatives clearing organization to submit any rule changes pursuant
to Sec. 40.5 or Sec. 40.6, and Sec. 40.10, as applicable, of this
chapter;
(D) A statement as to whether the derivatives clearing organization
has informed, or intends to inform, its clearing members and/or the
general public of the new product and, if written notice was given, a
web address for or copy of such notice; and
(E) An explanation of any substantive opposing views received and
how the derivatives clearing organization addressed such views or
objections.
(5) Requested reporting. A derivatives clearing organization shall
provide upon request by the Commission and within the time specified in
the request:
(i) Any information related to its business as a clearing
organization, including information relating to trade and clearing
details.
(ii) A written demonstration, containing supporting data,
information and documents, that the derivatives clearing organization
is in compliance with one or more core principles and relevant
provisions of this part.
0
19. In Sec. 39.20, revise paragraphs (a) introductory text and (b) to
read as follows:
Sec. 39.20 Recordkeeping.
(a) Requirement to maintain information. A derivatives clearing
organization shall maintain records of all activities related to its
business as a derivatives clearing organization. Such records shall
include, but are not limited to, records of:
* * * * *
(b) Form and manner of maintaining information--(1) General. The
records required to be maintained by this chapter shall be maintained
in accordance with the provisions of Sec. 1.31 of this chapter, for a
period of not less than 5 years, except as provided in paragraph (b)(2)
of this section.
(2) Exception for swap data. A derivatives clearing organization
that clears swaps must maintain swap data in accordance with the
requirements of part 45 of this chapter.
0
20. Revise Sec. 39.21 to read as follows:
Sec. 39.21 Public information.
(a) General. A derivatives clearing organization shall provide to
market participants sufficient information to enable the market
participants to identify and evaluate accurately the risks and costs
associated with using the services of the derivatives clearing
organization. In furtherance of the objective in this paragraph (a), a
derivatives clearing organization shall have clear and comprehensive
rules and procedures.
(b) Availability of information. A derivatives clearing
organization shall make information concerning the rules and the
operating and default procedures governing the clearing and settlement
systems of the derivatives clearing organization available to market
participants.
(c) Public disclosure. A derivatives clearing organization shall
make the following information readily available to the general public,
in a timely manner, by posting such information on the derivatives
clearing organization's website, unless otherwise permitted by the
Commission:
(1) The terms and conditions of each contract, agreement, and
transaction cleared and settled by the derivatives clearing
organization;
(2) Each clearing and other fee that the derivatives clearing
organization charges its clearing members;
(3) Information concerning its margin-setting methodology;
(4) The size and composition of the financial resource package
available in the event of a clearing member default, updated as of the
end of the most recent fiscal quarter or upon Commission request and
posted concurrently with submission of the report to the Commission
under Sec. 39.11(f)(1)(i)(A);
(5) Daily settlement prices, volume, and open interest for each
contract, agreement, or transaction cleared or settled by the
derivatives clearing organization, posted no later than the business
day following the day to which the information pertains;
(6) The derivatives clearing organization's rulebook, including
rules and procedures for defaults in accordance with Sec. 39.16;
(7) A current list of all clearing members;
(8) A list of all swaps that the derivatives clearing organization
will
[[Page 22278]]
accept for clearing that identifies which swaps on the list are
required to be cleared, in accordance with Sec. 50.3(a) of this
chapter; and
(9) Any other information that is relevant to participation in the
clearing and settlement activities of the derivatives clearing
organization.
0
21. Revise Sec. 39.22 to read as follows:
Sec. 39.22 Information sharing.
A derivatives clearing organization shall enter into, and abide by
the terms of, each appropriate and applicable domestic and
international information-sharing agreement, and shall use relevant
information obtained from each such agreement in carrying out the risk
management program of the derivatives clearing organization.
0
22. Add Sec. 39.24 to read as follows:
Sec. 39.24 Governance.
(a) General. (1) A derivatives clearing organization shall have
governance arrangements that:
(i) Are written;
(ii) Are clear and transparent;
(iii) Place a high priority on the safety and efficiency of the
derivatives clearing organization; and
(iv) Explicitly support the stability of the broader financial
system and other relevant public interest considerations of clearing
members, customers of clearing members, and other relevant
stakeholders.
(2) The board of directors shall make certain that the derivatives
clearing organization's design, rules, overall strategy, and major
decisions appropriately reflect the legitimate interests of clearing
members, customers of clearing members, and other relevant
stakeholders.
(3) To the extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure:
(i) Major decisions of the board of directors shall be clearly
disclosed to clearing members, other relevant stakeholders, and to the
Commission; and
(ii) Major decisions of the board of directors having a broad
market impact shall be clearly disclosed to the public.
(b) Governance arrangement requirements. A derivatives clearing
organization shall have governance arrangements that:
(1) Are clear and documented;
(2) To an extent consistent with other statutory and regulatory
requirements on confidentiality and disclosure, are disclosed, as
appropriate, to the Commission, other relevant authorities, clearing
members, customers of clearing members, owners of the derivatives
clearing organization, and to the public;
(3) Describe the structure pursuant to which the board of
directors, committees, and management operate;
(4) Include clear and direct lines of responsibility and
accountability;
(5) Clearly specify the roles and responsibilities of the board of
directors and its committees, including the establishment of a clear
and documented risk management framework;
(6) Clearly specify the roles and responsibilities of management;
(7) Describe procedures pursuant to which the board of directors
oversees the chief risk officer, risk management committee, and
material risk decisions;
(8) Provide risk management and internal control personnel with
sufficient independence, authority, resources, and access to the board
of directors so that the operations of the derivatives clearing
organization are consistent with the risk management framework
established by the board of directors;
(9) Assign responsibility and accountability for risk decisions,
including in crises and emergencies; and
(10) Assign responsibility for implementing the:
(i) Default rules and procedures required by Sec. Sec. 39.16 and
39.35, as applicable;
(ii) System safeguard rules and procedures required by Sec. Sec.
39.18 and 39.34, as applicable; and
(iii) Recovery and wind-down plans required by Sec. 39.39, as
applicable.
(c) Fitness standards. (1) A derivatives clearing organization
shall establish and enforce appropriate fitness standards for:
(i) Directors;
(ii) Members of any disciplinary committee;
(iii) Members of the derivatives clearing organization;
(iv) Any other individual or entity with direct access to the
settlement or clearing activities of the derivatives clearing
organization; and
(v) Any other party affiliated with any individual or entity
described in this paragraph.
(2) A derivatives clearing organization shall maintain policies to
make certain that:
(i) The board of directors consists of suitable individuals having
appropriate skills and incentives;
(ii) The performance of the board of directors and the performance
of individual directors is reviewed on a regular basis; and
(iii) Managers have the appropriate experience, skills, and
integrity necessary to discharge operational and risk management
responsibilities.
0
23. Add Sec. 39.25 to read as follows:
Sec. 39.25 Conflicts of interest.
A derivatives clearing organization shall:
(a) Establish and enforce rules to minimize conflicts of interest
in the decision-making process of the derivatives clearing
organization;
(b) Establish a process for resolving such conflicts of interest;
and
(c) Describe procedures for identifying, addressing, and managing
conflicts of interest involving members of the board of directors.
0
24. Add Sec. 39.26 to read as follows:
Sec. 39.26 Composition of governing boards.
A derivatives clearing organization shall ensure that the
composition of the governing board or board-level committee of the
derivatives clearing organization includes market participants and
individuals who are not executives, officers, or employees of the
derivatives clearing organization or an affiliate thereof. For purposes
of this section, ``market participant'' means any clearing member of
the derivatives clearing organization or customer of a clearing member,
or an employee, officer, or director of such an entity.
0
25. In Sec. 39.27, revise paragraph (c) to read as follows:
Sec. 39.27 Legal risk considerations.
* * * * *
(c) Conflict of laws. If a derivatives clearing organization
provides clearing services outside the United States:
(1) The derivatives clearing organization shall identify and
address any material conflict of law issues. The derivatives clearing
organization's contractual agreements shall specify a choice of law.
(2) The derivatives clearing organization shall be able to
demonstrate the enforceability of its choice of law in relevant
jurisdictions and that its rules, procedures, and contracts are
enforceable in all relevant jurisdictions.
(3) The derivatives clearing organization shall ensure on an
ongoing basis that the memorandum required in paragraph (b) of Exhibit
R to appendix A to this part is accurate and up to date and shall
submit an updated memorandum to the Commission promptly following all
material changes to the analysis or content contained in the
memorandum.
Sec. 39.32 [Removed and Reserved]
0
26. Remove and reserve Sec. 39.32.
0
27. In Sec. 39.33, revise paragraphs (a)(1) and (c)(1)(i), and add
paragraph (d)(5) to read as follows:
[[Page 22279]]
Sec. 39.33 Financial resources requirements for systemically
important derivatives clearing organizations and subpart C derivatives
clearing organizations.
(a) * * *
(1) Notwithstanding the requirements of Sec. 39.11(a)(1), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization that, in either case, is systemically
important in multiple jurisdictions or is involved in activities with a
more complex risk profile shall maintain financial resources sufficient
to enable it to meet its financial obligations to its clearing members
notwithstanding a default by the two clearing members creating the
largest combined financial exposure to the derivatives clearing
organization in extreme but plausible market conditions.
* * * * *
(c) * * *
(1) * * *
(i) Notwithstanding the provisions of Sec. 39.11(e)(1)(ii), each
systemically important derivatives clearing organization and subpart C
derivatives clearing organization shall maintain eligible liquidity
resources, in all relevant currencies, that, at a minimum, will enable
it to meet its intraday, same-day, and multiday obligations to perform
settlements, as defined in Sec. 39.14(a)(1), with a high degree of
confidence under a wide range of stress scenarios that should include,
but not be limited to, a default by the clearing member creating the
largest aggregate liquidity obligation for the systemically important
derivatives clearing organization or subpart C derivatives clearing
organization in extreme but plausible market conditions.
* * * * *
(d) * * *
(5) A systemically important derivatives clearing organization with
access to accounts and services at a Federal Reserve Bank, pursuant to
section 806(a) of the Dodd-Frank Act, 12 U.S.C. 5465(a), shall use such
accounts and services where practical.
* * * * *
0
28. In Sec. 39.36, revise paragraphs (a)(5)(ii), (a)(6), (b)(2)(ii),
(d) and (e) to read as follows:
Sec. 39.36 Risk management for systemically important derivatives
clearing organizations and subpart C derivatives clearing
organizations.
(a) * * *
(5) * * *
(ii) Using the results to assess the adequacy of, and to adjust,
its total amount of financial resources; and
(6) Use the results of stress tests to support compliance with the
minimum financial resources requirement set forth in Sec. 39.11(a)(1)
or Sec. 39.33(a), as applicable.
(b) * * *
(2) * * *
(ii) Testing of the ability of the models or model components to
react appropriately using actual or hypothetical datasets and assessing
the impact of different model parameter settings.
* * * * *
(d) Margin model assessment. Each systemically important
derivatives clearing organization and subpart C derivatives clearing
organization shall conduct, on at least an annual basis (or more
frequently if there are material relevant market developments), an
assessment of the theoretical and empirical properties of its margin
model for all products it clears.
(e) Independent validation. Each systemically important derivatives
clearing organization and subpart C derivatives clearing organization
shall perform, on an annual basis, a full validation of its financial
risk management model and its liquidity risk management model.
* * * * *
0
29. In Sec. 39.37, revise paragraphs (b) and (c) to read as follows:
Sec. 39.37 Additional disclosure for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
* * * * *
(b)(1) Review and update its responses disclosed as required by
paragraph (a) of this section at least every two years and following
material changes to the systemically important derivatives clearing
organization's or subpart C derivatives clearing organization's system
or the environment in which it operates. A material change to the
systemically important derivatives clearing organization's or subpart C
derivatives clearing organization's system or the environment in which
it operates is a change that would significantly change the accuracy
and usefulness of the existing responses; and
(2) Provide notice to the Commission of updates to its responses
required by paragraph (b)(1) of this section following material changes
no later than ten business days after the updates are made. Such notice
shall be accompanied by a copy of the text of the responses that shows
all deletions and additions made to the immediately preceding version
of the responses;
(c) Disclose, publicly and to the Commission, relevant basic data
on transaction volume and values consistent with the standards set
forth in the Public Quantitative Disclosure Standards for Central
Counterparties published by the Committee on Payments and Market
Infrastructures and the International Organization of Securities
Commissions;
* * * * *
0
30. In Sec. 39.39, revise paragraph (a)(2) to read as follows:
Sec. 39.39 Recovery and wind-down for systemically important
derivatives clearing organizations and subpart C derivatives clearing
organizations.
(a) * * *
(2) Wind-down means the actions of a systemically important
derivatives clearing organization or subpart C derivatives clearing
organization to effect the permanent cessation or sale or transfer of
one or more services.
* * * * *
0
31. Revise appendix A to part 39 to read as follows:
Appendix A to Part 39--Form DCO Derivatives Clearing Organization
Application for Registration
BILLING CODE 6351-01-P
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0
32. Revise appendix B to part 39 to read as follows:
Appendix B to Part 39--Subpart C Election Form
[[Page 22308]]
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[[Page 22316]]
BILLING CODE 6351-01-C
PART 140--ORGANIZATION, FUNCTIONS, AND PROCEDURES OF THE COMMISSION
0
33. The authority citation for part 140 continues to read as follows:
Authority: 7 U.S.C. 2(a)(12), 12a, 13(c), 13(d), 13(e), and
16(b).
0
34. In Sec. 140.94, revise paragraph (c) to read as follows:
Sec. 140.94 Delegation of authority to the Director of the Division
of Swap Dealer and Intermediary Oversight and the Director of the
Division of Clearing and Risk.
* * * * *
(c) The Commission hereby delegates, until such time as the
Commission orders otherwise, the following function to the Director of
the Division of Clearing and Risk and to such members of the
Commission's staff acting under his or her direction as he or she may
designate from time to time:
(1) The authority to review applications for registration as a
derivatives clearing organization filed with the Commission under Sec.
39.3(a)(1) of this chapter, to determine that an application is
materially complete pursuant to Sec. 39.3(a)(2) of this chapter, to
request additional information in support of an application pursuant to
Sec. 39.3(a)(3) of this chapter, to extend the review period for an
application pursuant to Sec. 39.3(a)(6) of this chapter, to stay the
running of the 180-day review period if an application is incomplete
pursuant to Sec. 39.3(b)(1) of this chapter, to review requests for
amendments to orders of registration filed with the Commission under
Sec. 39.3(d)(1) of this chapter, to request additional information in
support of a request for an amendment to an order of registration
pursuant to Sec. 39.3(d)(2) of this chapter, and to request additional
information in support of a rule submission pursuant to Sec.
39.3(g)(3) of this chapter;
(2) All functions reserved to the Commission in Sec. 39.4(a) of
this chapter;
(3) All functions reserved to the Commission in Sec. 39.5(b)(2),
(b)(3)(ix), (c)(1), and (d)(3) of this chapter;
(4) All functions reserved to the Commission in Sec.
39.10(c)(4)(iv) of this chapter;
(5) All functions reserved to the Commission in Sec.
39.11(b)(1)(v), (b)(2)(ii), (c)(1) and (3), and (f)(1), and (2) of this
chapter;
(6) All functions reserved to the Commission in Sec.
39.12(a)(5)(iii) of this chapter;
(7) All functions reserved to the Commission in Sec.
39.13(g)(8)(ii), (h)(1)(i)(C), (h)(1)(ii), (h)(3)(i) and (ii), and
(h)(5)(i)(C) of this chapter;
(8) The authority to request additional information in support of a
rule submission under Sec. Sec. 39.13(i)(2) and 39.15(b)(2)(iii) of
this chapter;
(9) All functions reserved to the Commission in Sec. 39.19(c)(2),
(c)(3)(iv), and (c)(5) of this chapter;
(10) All functions reserved to the Commission in Sec. 39.20(a)(5)
of this chapter;
(11) All functions reserved to the Commission in Sec. 39.21(c) of
this chapter;
(12) All functions reserved to the Commission in Sec. 39.31 of
this chapter; and
(13) The authority to approve the requests described in Sec. Sec.
39.34(d) and 39.39(f) of this chapter.
* * * * *
Issued in Washington, DC, on April 29, 2019, by the Commission.
Christopher Kirkpatrick,
Secretary of the Commission.
Note: The following appendices will not appear in the Code of
Federal Regulations.
Appendices to Derivatives Clearing Organization General Provisions and
Core Principles--Commission Voting Summary, Chairman's Statement, and
Commissioner's Statement
Appendix 1--Commission Voting Summary
On this matter, Chairman Giancarlo and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.
Appendix 2--Statement of Chairman J. Christopher Giancarlo
Swaps clearing is among the most sweeping and significant of the
swaps reforms adopted by the Dodd-Frank Act. By any measure, the
CFTC's swaps clearing regime has been robust and highly successful.
In 2011 and 2013, the Commission adopted regulations in part 39
to implement the Dodd-Frank Act's Core Principles for Derivatives
Clearing Organizations (DCOs). Since the adoption of these rules,
Commission staff has worked with DCOs regarding questions concerning
the interpretation and implementation of the regulations, and issued
related staff relief or guidance.
As part of Project KISS, the Commission is proposing to revise
or delete certain provisions in part 39. These revisions will
improve the clarity of the text, codify staff relief and guidance,
and simplify processes for registration or reporting. There are also
a few new requirements with respect to default procedures and
reporting in response to more recent events, such as the launch of
bitcoin futures contracts and the Nasdaq Clearing default. For these
reasons, I support this proposal.
Appendix 3--Statement of Commissioner Dan M. Berkovitz
Introduction
I support issuing for public comment the notice of proposed
rulemaking (``NPRM'') to amend certain provisions of part 39 of the
Commission's regulations governing derivatives clearing
organizations (``DCOs''). Part 39 generally covers registration and
regulation of DCOs that centrally clear futures, options, and swaps
regulated by the Commission.
The NPRM includes a number of beneficial provisions. I commend
the staff of the Division of Clearing and Risk for this important
effort to clarify and clean up some issues in the rules and staff
guidance that have accumulated since part 39 was substantively
amended in 2011 and 2013. The NPRM also proposes several changes to
the regulations that merit scrutiny as outlined below. I
particularly look forward to comments on those provisions to help
guide the Commission's deliberations on the proposed amendments.
Background
Central clearing of futures positions has been a fundamental
risk mitigation measure for derivatives market participants in the
United States for well over a hundred years. In more recent times,
as futures and swap trading has grown dramatically,\1\ central
clearing of derivatives including swaps has become a critical
element in risk management of the financial system as a whole. In
response to the 2008 financial crisis, world leaders at the G20
summit in Pittsburgh established central clearing for derivatives as
a core objective in mitigating systemic risk.\2\ DCOs are a critical
component of the clearing infrastructure, and effective
clearinghouse registration and regulation is key to facilitating
efficient, sound derivatives markets and preventing another
financial crisis.
---------------------------------------------------------------------------
\1\ A CFTC study published in 1998 noted that an estimated 272
million futures and options contracts were traded globally in 1986,
while recent Futures Industry Association data indicates that 30.28
billion futures and options contracts were traded globally in 2018.
See CFTC, Division of Economic Analysis, The Global Competitiveness
of U.S. Futures Markets Revisited (November 1999); available at
https://www.cftc.gov/sites/default/files/idc/groups/public/@swaps/documents/file/plstudy_53_cftc.pdf; FIA Releases Annual Trading
Statistics showing Record [Exchange Traded Derivatives] Volume in
2018; available at https://fia.org/articles/fia-releases-annual-trading-statistics-showing-record-etd-volume-2018. Similarly, the
trading of over-the-counter derivatives expanded from about $72
trillion in notional amount in 1998 to about $595 trillion in 2018.
See Bank of International Settlements, OTC derivatives notional
amount outstanding by risk category; available at https://stats.bis.org/statx/srs/tseries/OTC_DERIV/H:A:A:A:5J:A:5J:A:TO1:TO1:A:A:3:C?t=D5.1&p=20172&x=DER_RISK.3.CL_MARKET_RISK.T:B:D:A&o=w:19981.,s:line.nn,t:Derivatives%20risk%20category.
\2\ See G20, Leaders' Statement: The Pittsburgh Summit (Sept.
24-25, 2009); available at https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf.
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As described in the NPRM, the Commission adopted regulations in
2011 and
[[Page 22317]]
2013 to further implement DCO core principles and Title VIII of the
Dodd-Frank Act. Based on experience in implementing these
regulations and subsequent developments, including the establishment
of international principles for clearing, the CFTC staff has
provided guidance on the new regulations. It is now appropriate for
the Commission to address this experience and these developments
through amendments to our regulations.
Codification and Clarification
The NPRM includes numerous amendments that clarify, further
define, or provide more explicit direction to market participants.
Governance requirements are more fully developed and applied across
all DCOs. The NPRM adds new regulations 39.24, 39.25, and 39.26 that
establish governance requirements for DCOs to better ensure that
DCOs are well managed.\3\ These amendments provide greater certainty
and uniform rules, and are important not only for fairness and
consistency, but to improve risk management across the clearing
space. The changes may help guard against risks from governance
failures.
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\3\ See NPRM section IV.J.
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While the new governance regulations are beneficial, many of the
provisions set out only general principles and do not provide
specific guidance or prescriptive standards. I look forward to
public comment on whether more explicit guidance or requirements
would be appropriate for any specific provisions. In particular, I
look forward to comments on whether members should play a larger
role in governance.
Under the NPRM, regulation 39.16 would be amended to improve
requirements around member default management.\4\ The recent member
default at NASDAQ Clearing reinforces the importance of default
management mechanisms and information sharing when a default
occurs.\5\ The amendments explicitly require DCOs to have a default
committee that must include clearing members. In addition, the
amendments would require a DCO to include members in tests of the
default management plan. I look forward to comments on how and when
DCO members should be included in default management.
---------------------------------------------------------------------------
\4\ See NPRM section IV.F.
\5\ See Luke Clancy, Margin or membership? Regulators react to
Nasdaq default, Risk.net (Feb. 7, 2019) available at: https://www.risk.net/regulation/6366441/margin-or-membership-regulators-react-to-nasdaq-default.
---------------------------------------------------------------------------
In addition to the above, the NPRM would provide a number of
more discrete improvements, such as an explicit requirement for
initial margin to cover concentration risk; a requirement for DCO
personnel to certify certain reports; and several new reporting
requirements around settlement bank arrangements, depositories, and
liquidity funding arrangements. Clarifying these types of issues
will help maintain consistent, objective, and transparent oversight
of registered DCOs.
Issues Warranting Further Comment and Consideration
The NPRM includes several proposed amendments that, while
beneficial in some respects, may also present additional issues for
the Commission to consider in developing the final rule. Comments in
these areas would be particularly helpful to inform the Commission
in its deliberations.
Changes to regulation 39.13(g)(8) regarding calculation of
initial margin and in particular, excess margin, attempt to
incorporate in the regulation, and to clarify, staff guidance.\6\
Getting initial margin calculations right is critical to providing
sufficient resources to cover variation margin shortfalls that may
occur when resolving a member's default. The proposed standard for
margin to be ``commensurate with the risk presented by each customer
account,'' as a principle, seems appropriate. However, little
guidance is provided on how that principle should be applied or the
appropriate parameters for consideration. Given the importance of
initial margin calculations, I look forward to comments on whether
the Commission should provide a more detailed standard in the
regulation or further guidance on the calculation.
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\6\ See NPRM section IV.D.3.f.
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New regulation 39.13(i) provides explicit procedures and
requirements for filing DCO rules to implement a cross-margining
program with other clearing organizations.\7\ From a general policy
perspective, establishing explicit procedures in regulation for
evaluating such arrangements would facilitate consistent, objective
reviews by the Commission.
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\7\ See NPRM section IV.D.5.
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However, multi-entity cross-margining--which could cross borders
and involve multiple regulatory regimes of different regulators--
creates additional layers of legal, operational, and financial risk
that may be difficult to evaluate. The members of the DCO could be
affected in ways not previously contemplated and that may be more
obscure to the members and difficult for them to assess. The
information that the DCO would be required to provide to the
Commission under the NPRM is fashioned from less complex portfolio
margining evaluation requirements and is general in nature. Will a
bankruptcy involving a member of one of the clearing organizations,
the DCO, or the other clearing organization affect the other entity
and its members in ways that are not anticipated? Are there margin
model risks, such as greater concentration risk across both
entities, that are not properly accounted for in the proposed
regulations? Do members of the DCO have other concerns and do they
have appropriate mechanisms to voice those concerns through the DCO
rules, governance structures, and/or CFTC review procedures? I look
forward to reviewing the comments on these and other issues
regarding the proposed multi-entity cross margining regulations.
Finally, the NPRM would establish regulation 40.5 as the
mechanism for Commission review of certain DCO rule sets including:
(1) A request to transfer a DCO's open interest--in many cases its
entire open interest, (2) cross-margining programs among different
clearing organizations--including across borders and for entities
subject to different regulators, and (3) commingling of futures,
options, and swaps positions in a section 4d(a) futures account.
These rule reviews could involve consideration of novel issues,
customer protections, and other factors. Accordingly, I have some
concern that regulation 40.5 may not provide sufficiently robust
review procedures or the Commission with adequate authority to
require a DCO to mitigate risks arising from the proposed actions.
Section 40.5 was intended to address voluntary submission of DCO
rule changes pursuant to section 5c(c) of the Commodity Exchange
Act. While the process for submission and Commission review is more
detailed under regulation 40.5 than under regulation 40.6,
regulation 40.5 provides for automatic approval after 45 days if
that period is not extended by the Commission and a narrow standard
of review; namely, the Commission shall approve a DCO rule under
review unless it ``is inconsistent with the [Commodity Exchange] Act
or Commission's regulations.'' However, the DCO activities to which
this review procedure would be applied under the NPRM are
significant actions that likely will raise customer protection
concerns, entail a sophisticated risk management analysis, and call
for a more nuanced review and response than can be accomplished
under the blunt ``inconsistent with the CEA'' standard that governs
the Commission under regulation 40.5.
Accordingly, I encourage comments on whether regulation 40.5 is
the appropriate mechanism to review these proposed DCO actions or
whether a more balanced procedure should be employed that would
provide the Commission more flexibility to ensure the proposed
actions adequately address issues involving customer protection,
potential risks to FCMs, and market integrity.
Conclusion
In conclusion, I commend the staff of the Division of Clearing
and Risk for their efforts in preparing the NPRM to codify practices
that are currently addressed through staff guidance and to conform
our regulations to developments that have occurred since the
regulations were issued. The NPRM will help clarify and provide
explicit rules for clearing organizations that provide a vital
service to derivatives markets. Finally, I look forward to the
public comments on the NPRM, particularly on the proposed amendments
discussed above.
[FR Doc. 2019-09025 Filed 5-15-19; 8:45 am]
BILLING CODE 6351-01-P
